Question

Product Planning with Taxes
Assume that last year, Cliff Consulting, a firm in Berkeley, CA, had the following contribution income statement:

CLIFF CONSULTING Contribution Income Statement For the Year Ended September 30
Sales revenue		$ 1,200,000
Variable costs
Cost of services	$ 480,000
Selling and administrative	60,000	540,000
Contribution margin		660,000
Fixed Costs -selling and administrative		440,000
Before-tax profit		220,000
Income taxes (21%)		46,200
After-tax profit		$ 173,800

(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 $80,000?

Use rounded contribution margin ratio (2 decimal places) for your calculation.
Round your answer to the nearest dollar.
$Answer

(d) With the current cost structure, including fixed costs of $440,000, what dollar sales revenue is required to provide an after-tax net income of $250,000?

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.

CLIFF CONSULTING Income Statement
Sales	Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income before taxes	Answer
Income taxes (21%)	Answer
Net income after taxes	Answer

Answer 1

(a)

Break even point in sales revenue = Fixed costs / Contribution margin ratio

Contribution margin ratio = Contribution margin / Sales Revenue

= $660,000 / $1,200,000

= 55%

Break even point in sales revenue = $440,000 / 55%

= $800,000

(b)

Margin of safety in sales revenue = Current sales - Break even sales

= $1,200,000 - $800,000

= $400,000

(c)

Break even point in sales revenue = Fixed costs / Contribution margin ratio

Fixed costs = $440,000 + $80,000

= $520,000

Break even point in sales revenue = $520,000 / 55%

= $945,455

(d)

Before - tax profit = After tax profit / (100% - 21%)

= $250,000 / 79%

= $316,456

Sales revenue = (Before - tax profit + Fixed costs) / Contribution margin ratio

= ($316,456 + $440,000) / 55%

= $1,375,375

(e)

Sales	$1,375,375
Variable costs	$618,919
Contribution margin	$756,456
Fixed costs	$440,000
Net income before taxes	$316,456
Income taxes (21%)	$66,456
Net income after taxes	$250,000