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Westover Motors is a small car dealership. 0 n average, it sells a car for 32,000, which it purchases from the manufacturer for 28,000 .Each month, Westover Motors pays 53,700 in rent and utilities and 69,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of 400 for each car they sell. Westover Motors also spends 10,500 each month for local advertisements. Its tax rate is 40 \% 1\. How many cars must Westover Motors sell each month to break even? 2\. Westover Motors has a target monthly net income of 69,120 .What is its target monthly operating income? How many cars must be sold each month to reach the target monthly net income of 69,120 ?

Step by step solution

01

Identify Fixed Costs, Variable Costs, and Profit Margin per Car

First, find out the fixed costs, variable costs, and profit margin per car. Fixed costs (rent, utilities, salaries, advertisements) = 53,700 + 69,000 + 10,500 = 133,200 Variable costs (commission per car) = 400 Selling price per car = 32,000 Cost price per car = 28,000 Profit margin per car = Selling price - Cost price - commission = 32,000 - 28,000 - 400 = 3,600

02

Calculate Break-Even Point

To find the break-even point, we will use the following formula: Break-even point (in units) = Fixed Costs / (Profit Margin per Car) Break-even point (in units) = 133,200 / 3,600 = 37 So, Westover Motors needs to sell 37 cars each month to break even.

03

Calculate Target Monthly Pre-Tax Income

To find the target monthly pre-tax income, we will use the following formula: Target Monthly Pre-Tax Income = Target Monthly Net Income / (1 - Tax Rate) Target Monthly Pre-Tax Income = 69,120 / (1 - 0.4) = 69,120 / 0.6 = 115,200

04

Calculate Number of Cars for Target Monthly Net Income

To find out how many cars are needed to be sold each month to achieve the target monthly net income, use the following formula: Number of cars = (Target Monthly Pre-Tax Income + Fixed Costs) / Profit Margin per Car Number of cars = (115,200 + 133,200) / 3,600 = 248,400 / 3,600 ≈ 69 So, Westover Motors needs to sell approximately 69 cars each month to reach the target monthly net income of 69,120.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

fixed costs

Fixed costs are expenses that do not change with the level of production or sales.
They remain constant regardless of how many cars Westover Motors sells.
In this case, the fixed costs include rent, utilities, salaries, and advertisements.
These costs are crucial to consider as they need to be covered, even if no cars are sold.

Calculating fixed costs involves adding together all these consistent expenses:

• Rent and utilities: 53,700
• Salaries: 69,000
• Advertisements: 10,500

These costs add up to a total fixed cost of 133,200.
This means every month, Westover Motors must at least cover this amount to avoid losses.

Understanding fixed costs helps in determining the break-even point for a business:

• The point at which total revenue equals total costs — no profit, no loss.

variable costs

Variable costs fluctuate based on the business's performance levels.
For Westover Motors, these costs vary with each car sold, specifically through sales commissions.
Each time a car is sold, the salesperson earns a commission of 400. This cost directly ties to the volume of sales.

Here’s what happens with variable costs:

• If Westover Motors sells more cars, total variable costs increase due to more commissions.
• Conversely, if no cars are sold, the variable cost is zero.

Understanding variable costs is essential for planning how profit changes with each sale.
They affect decisions on pricing and sales strategies and, when combined with fixed costs, impact the overall profitability of the dealership.

profit margin

Profit margin per car reflects the amount earned from a car sale after covering variable costs.
For each car, you begin with the selling price and subtract the cost price and any variable costs like commissions.
This gives us the margin.

In this scenario:

• Selling price of each car: 32,000
• Cost price per car: 28,000
• Commission per sale: 400

The profit margin per car would be: \[32,000 - 28,000 - 400 = 3,600\]This margin reveals the profit contributing towards covering fixed costs and generating net income.
A higher profit margin makes it easier to reach both break-even and profit targets, underlining its importance in financial planning.

net income

Net income is the profit remaining after all costs, including taxes, have been deducted from revenues.
It's the true profit indicator, showing how much money the business retains after covering all expenses.
Westover Motors aims for a monthly net income target of 69,120.

To compute the net income, consider:

• First, subtract the total costs (fixed and variable) from the revenue.
• Then, account for taxes by applying the tax rate, which affects the disposable income.

Net income is crucial for sustainability and growth, providing funds for reinvestment or distribution among stakeholders.

tax rate

The tax rate directly impacts the amount of net income retained by a business.
In this example, Westover Motors faces a tax rate of 40%, which means 40% of their income goes to tax payments.
Understanding the tax rate is critical for financial planning because it affects the net income.

Here’s how tax rates influence finances:

• The formula to determine pre-tax income: Divide the net income by (1 - tax rate).
• For instance, to achieve a net income of 69,120, the pre-tax income required is:\[69,120 / (1 - 0.4) = 115,200\]

With this understanding, businesses can better predict their actual earnings and plan necessary measures to ensure profitability after taxes.