Hydro Systems Engineering - Break Even Analysis
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Hydro Systems Engineering Associates, Inc. provides consulting services to city water authorities. The consulting firm's contribution-margin ratio is 20%, and its annual fixed expenses are $120,000. The firm's income-tax rate is 40%.
1. Calculate the firm's break-even volume of service revenue.
2. How much before-tax income must the firm earn to make an after-tax net income of $48,000?
3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $48,000?
4. Suppose the firm's income-tax rate rises to 45%. What will happen to the break-even level of consulting service revenue?
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Solution Summary
The solution presents the calculations used to arrive at the answers to the problems.
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1. To calculate the break even amount of revenue, we need only to cover fixed expenses. With a contribution ratio of 20%, it will take 120,000 / .2 = 600,000 of revenue. To prove the calculation: 600,000 - 80% for all costs = 600,000 - 480,000 = $120,000 - ...
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