Tire Shop

A tire shop charges a one-time fee of $150 upfront for the installation and lifetime maintenance of all four tires. The initial installation takes about one hour, with an additional two hours required for balancing, rotation, and occasional flat repairs—resulting in a total of three hours of expected service. 

• This entire service is covered by the one-time initial charge of $150, which effectively amounts to an hourly service charge of $150 ÷ 3 hrs = $50/hr.

• The tire shop pays an average wage of $20/hr to each tire technician. 

• It employs six tire technicians, each working 8 hours per day for 240 days per year. 

• The shop also incurs fixed annual costs of $200,000, which cover tools, rent, employee benefits, service managers, and other overhead expenses.

Questions

1. Calculate the following:

   1. Total service hour capacity

   2. Breakeven number of service hours

   3. Current operating capacity

2. Since the tire shop is underutilized, management is considering offering a 25% discount on the installation fee for a 30-day period. Recalculate the breakeven number of service hours per year based on this reduced price.

3. Develop the revenue, cost, and profit graphs using MS Excel

Answer

1. Calculations

   1. Total service hour capacity = 11,520 Hours/Year

   2. Breakeven number of service hours = 6,667 Hours/Year 

   3. Current operating capacity = 58%

2. Breakeven number of service hours by reducing the price by 25% = 7,267 Hours/Year. 

3. Figure 2-17 shows the solution generated using MS Excel for a wide range of possible demand scenarios.