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.
(b) Determine the annual margin of safety in sales revenue.
(c) What is the break-even point in sales revenue if management makes a decision that increases fixed costs by $80,000?
(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?
(e) Prepare an abbreviated contribution income statement to verify that the solution to requirement (d) will provide the desired after-tax income.

Cliff Consulting

a) Annual Break-even point in sales revenue is:

= $800,000

b) Annual margin of safety is:

= $400,000

c) If fixed costs increases by $80,000, the break-even point in sales revenue

= $945,455

d) Dollar Sales Revenue required to provide an after-tax net income of $250,000 is:

= $1,375,375

e) Abbreviated Contribution Income Statement

Sales revenue       $1,375,375

Variable costs =          618,919

Contribution =        $756,456

Fixed costs               440,000

Before tax income    316,456

Income tax (21%)        66,458

After-tax income   $249,998

equivalent to $250,000

Explanation:

a) Data and Calculations:

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

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

= $440,000/0.55

= $800,000

Annual margin of safety = normal sales revenue minus break-even sales revenue

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

= $400,000

Contribution margin ratio = contribution margin/sales revenue * 100

= $660,000/$1,200,000 * 100 = 55%

If fixed costs increases by $80,000, the break-even point in sales revenue

= ($440,000 + $80,000)/0.55 = $520,000/0.55 = $945,455

To achieve after-tax net income of $250,000, the required dollar sales revenue:

Net income after-tax = $250,000

Tax rate = 21%

Net income before tax = $250,000/1-21%

= $250,000/0.79 = $316,456

Sales dollars to achieve target profit = (Fixed costs + Target Profit/1 - 0.21)/Contribution margin

= ($440,000 + ($250,000/0.79))/0-55

= ($440,000 + $316,456)/0.55

= $756,456/0.55

= $1,375,375

Abbreviated Contribution Income Statement

Sales revenue       $1,375,375

Variable costs =          618,919

Contribution =        $756,456

Fixed costs               440,000

Before tax income    316,456

Income tax (21%)        66,458

After-tax income   $249,998

After-tax income is equivalent to $250,000

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