Sanborn Motors is a small car dealership. On average it sells a car for $29,000, which it purchases from the manufacturer for $25,000. Each month, Sanborn Motors pays $64,000 in rent and utilities and $71,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of $700 for each car they sell. Sanborn Motors also spends $14,000 each month for local advertisements. Its tax rate is 40%. Required 1. How many cars must Sanborn Motors sell each month to break even? 2. Sanborn Motors has a target monthly net income of $78,000. What is its target operating income? How many cars must be sold each month to reach the target monthly net income of $78,000? Requirement 1. How many cars must Sanborn Motors sell each month to break even? Let's begin by determining the formula for the breakeven number of cars. Breakeven number of cars Sanborn Motors must sell cars each month to break even. (Round the number of cars up to the nearest whole number.) Requirement 2. Sanborn Motors has a target monthly net income of $78,000. What is its target operating income? How many cars must be sold each month to reach the target monthly net income of $78,000? Next, determine the formula to calculate the target operating income. Target operating = income The target monthly operating income is $

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sanborn Motors is a small car dealership. On average it sells a car for $29,000, which it purchases from the manufacturer for $25,000. Each month, Sanborn Motors pays $64,000 in rent and
utilities and $71,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of $700 for each car they sell. Sanborn Motors also spends $14,000 each month for
local advertisements. Its tax rate is 40%.
Required
1. How many cars must Sanborn Motors sell each month to break even?
2. Sanborn Motors has a target monthly net income of $78,000. What is its target operating income? How many cars must be sold
each month to reach the target monthly net income of $78,000?
Requirement 1. How many cars must Sanborn Motors sell each month to break even?
Let's begin by determining the formula for the breakeven number of cars.
Breakeven
number of cars
=
Sanborn Motors must sell cars each month to break even. (Round the number of cars up to the nearest whole number.)
Requirement 2. Sanborn Motors has a target monthly net income of $78,000. What is its target operating income? How many cars must be sold each month to reach the target monthly net
income of $78,000?
Next, determine the formula to calculate the target operating income.
Target
operating
income
The target monthly operating income is $

Finally, determine the formula to calculate the number of cars that are required to be sold.
Quantity of
cars required =
to be sold
Sanborn Motors would need to sell
+
cars to reach the target monthly net income of $78,000. (Round the number of cars up to the nearest whole number.)

Expert Solution

Step 1 Introduction

Break Even Point (BEP) :— It is the point at which total cost is equal to total revenue. At this point, total contribution margin is equal to total fixed cost.

BEP in units = Fixed Cost/CM per unit

BEP in sales = Fixed Cost/CM Ratio

Where,

CM per unit = contribution margin per unit

CM Ratio = contribution margin ratio

Number of sales units required

= (Income before tax + Fixed Cost)/CM per unit

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