Tough Guy Truck and Tire has three lines of business: tire sales, service/repairs and accessories. Tires are typically for off road vehicles, and accessories include special lift suspensions and wheels. The average unit revenues and variable costs in each line of business are:
Tires (each) Service/Repair Accessories
Revenues $400 $1,500 $5,000
Parts & Labor 350 1,000 3,500
New tires are normally sold in sets of four. In addition to the above revenues and costs, each average service/repair results in the sale of one replacement tire and each average accessory sale results in the sale of a set of five tires which includes a spare. For the fiscal year just ended, Tough Guy sold 300 sets of new tires (independent of tire sales related to service or accessories), performed 300 service/repair jobs, and installed 100 lift suspensions. Tough Guy's fixed costs for the coming year are estimated to be $1,000,000.
1. To calculate a breakeven point for the coming year, Tough Guy's controller uses prior year data to prepare a unit contribution margin analysis using the concept of bundling. What proportions will be assigned in the bundle to tires, service, and accessories?
2. Next, Tough Guy's controller calculates the contribution margin for the bundle. How many bundles must be sold for Tough Guy to break even?
3. Tough Guy's president and owner has been in the tire business for decades and monitors sales of tires more closely than anything else. Concerned by the magnitude of the company's fixed costs, he asks the controller how many tires will be sold at the company's breakeven point. The controller answers: