Question

Profitability Analysis
Assume Strands, a local hair salon, provides cuts, perms, and hairstyling services. Annual fixed costs are $150,000, and variable costs are 40 percent of sales revenue. Last year's revenues totaled $300,000.

(a) Determine its break-even point in sales dollars.
$Answer 375,000 wrong

(b) Determine last year's margin of safety in sales dollars.
$Answer 75,000 wrong

(c) Determine the sales volume required for an annual profit of $80,000.

Round your answer to the nearest dollar.
$Answer 316,667 wrong

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

D) 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.
$ 657,692 wrong

Answer 1

(a) Determine its break-even point in sales dollars.

Break-even point in sales dollars = Fixed Cost/Contribution margin ratio

Fixed Cost = 150,000

Contribution margin ratio = (1- variable cost % of sales)

Contribution margin ratio = (1-40%)

Contribution margin ratio = 60%

Break-even point in sales dollars = 150,000/60%

Break-even point in sales dollars = $ 250,000

(b) Determine last year's margin of safety in sales dollars.

Margin of safety in sales dollars = Total Sale revenue - Break-even point in sales dollars

Margin of safety in sales dollars = 300,000 - 250,000

Margin of safety in sales dollars = $50,000

(c) Determine the sales volume required for an annual profit of $80,000.

Sales volume required for an annual profit of $80,000 =  (Fixed Cost+ required Profit)/Contribution margin ratio

Sales volume required for an annual profit of $80,000 = (150,000+80,000)/60%

Sales volume required for an annual profit of $80,000 = $ 383,333

(d) Determine its break-even point in sales dollars.

Break-even point in sales dollars = Fixed Cost/Contribution margin ratio

Fixed Cost = 150,000+57,000 =$207,000

Break-even point in sales dollars = 207,000/60%

Break-even point in sales dollars = $ 345,000

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