Multiple Product Planning with Taxes In the year 2017, Pyramid Consulting had th

ID: 2516981 • Letter: M

Question

Multiple Product Planning with Taxes
In the year 2017, Pyramid Consulting had the following contribution income statement:

(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

Use rounded contribution margin ratio (2 decimal places) for your calculation.
$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 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
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

Explanation / Answer

Break-even point in Dollars can be calculated by dividing the total fixed cost with contribution Margin ratio.

Contribution Margin ratio as per Income statement = Contribution/Sales * 100

= 680000/1300000*100

=52.31%

Breakeven point in dollars= Fixed Cost/Contribution Margin% = 285000/52.31% = $539,117

Margin of Safety is calculated by deducting Break-even sales from Projected Sales.

Margin of Safety= Projected Sale – Breakeven Sale

= 1,300,000 – 539,117

= $760,882

(680,000+ 57,000) / 52.31%

= $1,408,908

= $312,500 Since Fixed cost is $285,000; Contribution should be 285,000+312500= $597,500

For contribution of 597,500, Sale required to be made is 597,500 / 52.31% = $1,142,229

Sales

1,142,229

variable cost

-544,729

Contribution

597,500

Fixed Cost

-285,000

Profit before Tax

312,500

Less: Tax 36%

112,500

Profit after tax

200,000

Please note that Variable cost is 47.69% of Sale value since Contribution margin ratio is 52.31%