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 $285,000. 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 $154,000?
3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $154,000?
4. Suppose the firm’s income-tax rate changes to 20 percent. What will happen to the break-even level of consulting service revenue?

Answer 1

Answers

· [1]

A	Fixed expenses	$285,000
B	CM Ratio	15%
C = A/B	Break even volume of service revenue	$1,900,000	Answer

· [2]

A	After tax net income	$154,000
B	Tax rate	30%
C = A/(100% - 30%)	Before tax income to be earned	$220,000	Answer

· [3]

A	After tax net income	$154,000
B	Hence, before tax income	$220,000
C	Fixed expenses	$285,000
D = B+C	Total contribution margin required	$505,000
E	CM Ratio	15%
F = D/E	Level of revenue required	$3,366,667	Answer

· [4]

The Break even level will STAY THE SAME, even if income tax rate changes to 20%.

A	Fixed expenses	$285,000
B	CM Ratio	15%
C = A/B	Break even volume of service revenue	$1,900,000