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Tommy’s Tile Service is planning on purchasing new tile cleaning equipment that will improve their ability...

Tommy’s Tile Service is planning on purchasing new tile cleaning equipment that will improve their ability to remove tough stains from ceramic tiles. The company’s contribution margin is 25% and its current break-even point is $487,200 in sales revenue. Purchasing the new equipment will increase fixed costs by $11,000.

Required:

1. Determine the company’s current fixed costs.

2. Determine the company’s new break-even point in sales.

3. After the purchase of the equipment, how much revenue does the company need to generate a profit of $135,000?

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Homework Answers

Answer #1

Solution:

1. $121,800

2. $531,200

3. $1071,200

Explanation:

1.

Sales needed to break even = Fixed cost / Contribution margin ratio

487200 = Fixed cost / 0.25

Fixed cost = 487200 x 0.25 = $121,800

2.

New fixed costs = 121800 + 11000 = 132,800

Sales needed to break even = 132800 / 0.25 = $531,200

3.

Target sales = (Fixed cost + Target profit) / Contribution margin ratio = (132800 + 135000) / 0.25 =$1071200

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