Question

Multiple Product Planning with Taxes
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.
$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 Income Statement For the Year 2017
Sales	$Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income before taxes	Answer
Income taxes (36%)	Answer
Net income after taxes	$Answer

Answer 1

1. Computation of Annual Breakeven Sales (in dollars):

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

1. Annual margin of Safety in Sale revenue

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

1. If Fixed cost is increased by $57,000; New Breakeven point in dollars would be

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

= $1,408,908

1. To earn an after-tax net income of $200,000; Before tax profit should be $200,000 (100%-36%)

= $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

1. Income statement will look like below:

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%