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

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

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

Round your answer to the nearest dollar.
$Answer

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 Contribution Income Statement and Operating Leverage Stateline Berry Farm harvests early-season blueberries for shipment throughout Michigan and Illinois in July. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the blueberries. The blueberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Stateline Berry Farm logo inviting buyers to "Enjoy the berry best blueberries in the world!" The selling price is $90 per crate, variable costs are $80 per crate, and fixed costs are $280,000 per year. In the year 2017, Stateline Berry Farm sold 50,000 crates. (a) Prepare a contribution income statement for the year ended December 31, 2017. HINT: Use a negative sign with both "costs" answers. STATELINE BERRY FARM Contribution Income Statement For the Year Ended December 31, 2017 Sales $Answer Variable costs Answer Contribution margin Answer Fixed costs Answer Net income $Answer (b) Determine the company's 2017 operating leverage. (Round your answer to two decimal places.) Answer (c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.) Answer % decrease (d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $375,000 and reduce variable costs to $77.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answers two decimal places.) Answer The acquisition of the berry-picking machines will reduce variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage. The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage. The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also decrease fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage. The acquisition of the berry-picking machines will reduce variable costs, thereby increasing the contribution margin. It will also reduce fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage.

Answer 1