Question

A. Falcon Environmental Services, Inc. provides consulting services to power plants . The consulting firm’s contribution-margin ratio is 15 percent, and its annual fixed expenses are $135,000. The firm’s income-tax rate is 35 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   $65,000?
3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $65,000?

Suppose the firm’s income-tax rate rises to 45 percent. Explain what will happen to the break-even level of consulting service revenue

Answer 1

1)

Break-even volume of service revenue = $135,000 / 15%

= $900,000

2)

Before-tax income = $65,000 / 65%

= $100,000

3)

Revenue = ($100,000 + $135,000) / 15%

= $1,566,666.67 (or) $1,566,667

4)

The break-even level of consulting service revenue will not change if the tax rate changes.

Break-even level of consulting service revenue will remain the same at $900,000