Jim Wright is considering opening a Kwik Oil Change Center. He estimates that the following costs will be incurred during his first year of operations: Rent $6000, Depreciation on equipment $7000, Wages $16,400,Motor oil $1.80 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay the Kwik Corporation a franchise fee of $1.40 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows:
Number of Oil Changes Utility Costs
4000 6000
6000 7300
9000 9600
12000 12600
19000 15000
Mr. Wright anticipates that he can provide the oil change service with a filter at $20.00 each.
(a) using the high low method, determine utility costs. In addition, determine the variable costs per unit and total fixed costs.
(b) 1. Determine the break even point in number of oil changes and sales dollars.
2. If the current level of oil changes is 6600, by what percentage can the number of oil changes decrease before Jim has to worry about having a net loss?