Question

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 $695,200 in sales revenue. Purchasing the new equipment will increase fixed costs by $15,000. 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 $175,000?

Answer 1

Ans. 1	Break even point in sales =   Fixed cost / Contribution margin ratio
	$695,200 = Fixed cost / 25%
	Fixed cost = $695,200 * 25%
	$173,800
	So, the current level of fixed cost is $173,800.
Ans. 2	New fixed cost ($173,800 + $15,000) = $188,800
	New Break even point in sales =   New Fixed cost / Contribution margin ratio
	$188,800 / 25%
	$755,200
Ans. 3	Sales for target profit   =   (New Fixed expense + Target profit) / Contribution margin ratio
	($188,800 + $175,000) / 25%
	$363,800 / 25%
	$1,455,200