Question

Hydro Systems Engineering Associates, Inc. provides consulting services to city water authorities. The consulting firm's contribution margin ratio is 15 percent, and its annual fixed expenses are $265,000. The firm's income-tax rate is 30 percent. Required: 1. Calculate the firm's break-even volume of service revenue. 2. How much before-tax income must the firm earn to make an after-tax net income of $146,000? 3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $146,000? 4. Suppose the firm's income-tax rate changes to 20 percent. What will happen to the break-even level of consulting service revenue? Complete this question by entering your answers in the tabs below. Req 4 Req 1 to 3 Calculate the firm's break-even volume of service revenue. How much before-tax income must the firm earn to make an after- tax net income of $146,000? What level of revenue for consulting services must the firm generate to earn an after-tax net income of $146,000? (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.) Break-even volume Before tax income $ 1,766,667 208,571 S Service revenue Req 1 to 3 Req 4

Answer 1

1) Break even Volume = Fixed Expenses/Contribution margin Ratio
Break even Volume =265,000/15%	$      1,766,667
2) Before Tax Income = after Tax income/( 1 - tax rate)	$         208,571
Before Tax Income =$146,000/(1 - 30%)
3) Service revenue required to earn target after-tax income of $146,000
Service revenue = ($265,000 + $208,571.43)/15%	$      3,157,143
4)
A change in the tax rate will have no effect on the firm's break-even point. At the break-even point, the firm has no profit and does not have to pay any income taxes