Question

Multiple Product Planning with Taxes In the year 2017, Pyramid Consulting had the following contribution income statement: PYRAMID CONSULTING Contribution Income Statement For the Year 2017 Sales revenue $ 1,300,000 Variable costs Cost of services $ 420,000 Selling and administrative 200,000 (620,000) Contribution margin 680,000 Fixed Costs -selling and administrative (285,000) Before-tax profit 395,000 Income taxes (36%) (142,200) After-tax profit $ 252,800 (a) Determine the annual break-even point in sales revenue. Round contribution margin ratio to two decimal places for your calculation. Round final answer to nearest dollar. $Answer (b) Determine the annual margin of safety in sales revenue. Use rounded answer from above for calculation. $Answer (c) What is the break-even point in sales revenue if management makes a decision that increases fixed costs by $57,000? Use rounded contribution margin ratio (2 decimal places) for your calculation. Round your answer UP to the nearest dollar. $Answer (d) With the current cost structure, including fixed costs of $285,000, what dollar sales revenue is required to provide an after-tax net income of $200,000? Use rounded contribution margin (2 decimal places) for calculation. Round your answer UP to the nearest dollar. $Answer (e) Prepare an abbreviated contribution income statement to verify that the solution to requirement (d) will provide the desired after-tax income. Use rounded contribution margin (2 decimal places) for variable cost/contribution margin computations. Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers. PYRAMID CONSULTING Income Statement For the Year 2017 Sales Variable costs Contribution margin Fixed costs Net income before taxes Income taxes (36%) Net income after taxes

Answer 1

Income Statement For the Year 2017 Amount in $ 1,300,000 Sales revenue Less: Variable costs: Variable costs Cost of services Selling and administrative 420,000 200,000 680,000 Contribution margin Less: Fixed Costs: selling and administrative Before-tax profit 285,000 395,000 142,200 252,800 Less: Income taxes (36%) After-tax profit A. Annual break-even point in sales revenue: Break-even point = Fixed Cost / PV Ratio PV Ration = = Contribution / Sales $ 680,000/ $ 1300,000 52.31% Break-even point = $285,000 / 52.31% 544,853 B. Annual margin of safety in sales revenue: Margin of Safety = = Profit / PV Ratio $395,000 / 52.31% 755,147 C. Break-even point in sales revenue If management makes a decision that increases fixed costs by $57,0007 Increased Fixed Cost = $285,000+ $57,000 342,000 Break-even point - Increased Fixed Cost / PV Ratio = $342,000 / 52.31% 653,824 D, what dollar sales revenue is required to provide an after-tax net income of $200,000? Desired after-tax net income = Before-tax net Income = = Tax Rate = 36% $ 200,000 $200,000/(100-36) $200,000 / 64% 312,500 Required Sales Revenue = { Fixed Cost + Required Before-tax net income) / PV Ratio - {$285,000 + $ 312,500 / 52.31% = ($ 597500)/52.31% 1,142,279 E. Income statement to verify that the solution to requirement (d) Amount in $ Sales revenue Less: Variable costs as % of Sales (100-52,31 = 47.69%) 1,142,279 544,779 Contribution margin @52.31% 597,500 Less: Fixed Costs: selling and administrative Before-tax profit Less: Income taxes (36X) 285,000 312,500 112,500 200,000 After-tax proflt