Ace Ventura is considering opening a Kwik Oil Centre. He estimates that the following costs will be incurred during his first year of operations: Rent $6,000, Depreciation on equipment $7,000, Wages $13,700, Motor oil $1.20 per litre. He estimates that each oil change will require 5 litres of oil. Oil filters will cost $3.00 each. He must also pay the Kwik Corporation a franchise fee of $1.25 per oil change since he will operate the business as a franchise. In addition, water and light costs are expected to behave in relation to the number of oil changes as follows:
Mr Ventura anticipates that he can provide the oil change service with a filter at $20.00 each.
Instructions:
(a) Using the high-low method, determine variable costs per unit and total fixed costs.
(b) Determine the break-even point in number of oil changes and sales dollars.
(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a target profit of $20,000, assuming fixed costs are $28,000 and the contribution margin per unit is $10.

Question

Ace Ventura is considering opening a Kwik Oil Centre. He estimates that the following costs will be incurred during his first year of operations: Rent $6,000, Depreciation on equipment $7,000, Wages $13,700, Motor oil $1.20 per litre. He estimates that each oil change will require 5 litres of oil. Oil filters will cost $3.00 each. He must also pay the Kwik Corporation a franchise fee of $1.25 per oil change since he will operate the business as a franchise. In addition, water and light costs are expected to behave in relation to the number of oil changes as follows:
  Mr Ventura anticipates that he can provide the oil change service with a filter at $20.00 each.
Instructions: 
(a) Using the high-low method, determine variable costs per unit and total fixed costs.
(b) Determine the break-even point in number of oil changes and sales dollars.
 (c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a target profit of $20,000, assuming fixed costs are $28,000 and the contribution margin per unit is $10.

Quizplus · Accepted Answer

The Answer of Ace Ventura is considering opening a Kwik Oil Centre. He estimates that the following costs will be incurred during his first year of operations: Rent $6,000, Depreciation on equipment $7,000, Wages $13,700, Motor oil $1.20 per litre. He estimates that each oil change will require 5 litres of oil. Oil filters will cost $3.00 each. He must also pay the Kwik Corporation a franchise fee of $1.25 per oil change since he will operate the business as a franchise. In addition, water and light costs are expected to behave in relation to the number of oil changes as follows:
  Mr Ventura anticipates that he can provide the oil change service with a filter at $20.00 each.
Instructions: 
(a) Using the high-low method, determine variable costs per unit and total fixed costs.
(b) Determine the break-even point in number of oil changes and sales dollars.
 (c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a target profit of $20,000, assuming fixed costs are $28,000 and the contribution margin per unit is $10.

Ace Ventura Is Considering Opening a Kwik Oil Centre