Question

Q1. Shine Bright Housekeeping provides two types of housekeeping services, Basic and Gold.
It charges customers $30 for a unit of Basic service and $50 for a unit of Gold service. Its direct costs in providing each unit of service are:

Basic $9, Gold $15. All other costs of the business are fixed and total $7,350 per month.

In all the sub-parts of this part (i.e., part 3.1, 3.2, etc.), assume that Shine Bright always provides a constant mix of the two services, namely 3 units of Basic service for every 2 units of Gold service....

3.1 What is Shine Bright’s Contribution Margin Ratio (CMR)?

Contd.

2

3.2 How much Sales Revenue should Shine Bright generate monthly to report Net-Income-after-tax (NIAT) of $11,760? The income tax rate is 20%. Use the CMR concept.

3.3. What is Shine Bright’s Degree-of-Operating-Leverage (DOL) at the Sales Revenue computed in part 3.2 above?

3.4. Using the DOL concept to get your answer, what will be Shine Bright’s NIAT if the Sales Revenue falls 10% from the level in part 3.2 ?

4. Using B to stand for units of Basic service, and G to stand for units of Gold service, specify the equation whose solutions are the combinations of the amounts of the two services that would allow Shine Bright to break-even each month.

That is, specify the “break-even function” f (B, G) = where C is a constant.

Answer 1

	3.1	CONTRIBUTION MARGIN RATIO
	a	Sales Revenue for 3 unts of Basic	$90	(3*30)
	b	Sales Revenue for 2 unts of Gold	$100	(50*2)
	c=a+b	Total Revenue for 5 units	$190
	d	Variable cost of 3 units basic	$27	(3*9)
	e	Variable cost of 2 units Gold	$30	(2*15)
	f=d+e	Total Variable Costs for 5 units	$57
	g=c-f	Contribution margin for 5 units	$133	(190-57)
	h=g/c	Contribution Margin Ratio	0.70
		Contribution Margin Ratio	70%
	3.2
	j	Fixed Cost	$7,350
	k=j/h	Break Even Sales	$10,500	(7350/0.7)
		After tax Profit	$11,760
		Tax Rate=20%	0.2
		Before tax profit=11760/(1-0.2)	$14,700
		Contribution needed beyond Breakeven	$14,700
		Sales Needed Beyond Breakeven	$21,000	(14700/0.7)
		Sales Revenue to be generated=10500+21000=	$31,500
	3.3	Degree of Operating Leverage =Contribution Margin/Operating Income
		Contribution margin at sales level 31500	$22,050	(31500*0.7)
		Operating Income at sales Level 31500	$14,700
		DOL (Degree of Operating Leverage)=22050/14700	1.5
	3.4	If Sales Revenue falls by 10%
		Decrease in Operating Income =10*1.5=15%
		Operating Income =14700*(1-0.15)=	$12,495
		Net Income After Tax =12495*(1-0.2)=	$9,996