Question

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

Answer to Part a.

Contribution Margin Ratio = Contribution Margin/ Sales Revenue * 100

Contribution Margin Ratio = $680,000/ $1,300,000 * 100

Contribution Margin Ratio = 52.31%

Break Even Point (Dollar Sales) = Fixed Cost/ Contribution Margin Ratio

Break Even Point (Dollar Sales) = $285,000/ 0.5231

Break Even Point (Dollar Sales) = $544,829

Answer to Part b.

Margin of Safety (Dollar Sales) = Current Sales - Break Even Sales

Margin of Safety (Dollar Sales) = $1,300,000 - $544,829

Margin of Safety (Dollar Sales) = $755,171

Answer to Part c.

Proposed Fixed Cost = $285,000 + $57,000 = $342,000

New Break Even Point (Dollar Sales) = $342,000/ 0.5231

New Break Even Point (Dollar Sales) = $653,795

Answer to Part d.

Desired After Tax Net Income = $200,000

Desired Before Tax Net Income=$200,000/(1-0.36) = $312,500

Required Sales = (Fixed Cost + Desired Before Tax Income)/ Contribution Margin Ratio

Required Sales = ($285,000 + $312,500)/ 0.5231

Required Sales = $1,142,229