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RealTimeService - % Increase in Profit

RealTimeService offers computer consulting, training and repair services. For the most recent fiscal year, profit was $230,000 as follows"

Consulting Training Repair Total
________________________________________________

- Sales: $500,000 $400,000 $300,000 $1,200,000

- Less variable costs:
*Salaries 250,000 160,000 180,000 590,000
*Supplies/parts 20,000 30,000 60,000 110,000
*Other 1,000 2,000 4,000 7,000
_________ ________ ________ ________
- Contribution
Margin 229,000 208,000 56,000 493,000

-Less Common fixed costs
*Rent 40,000
*Owner's salary 200,000
*Utilities 15,000
*Other 8,000
_______
Profit $230,000
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A) Jon Cisco, the owner of RealTimeService, believes that in the coming year he can increase sales by 20 percent. Assuming the current mix of services, what will be the percentage increase in profit associates with a 20 percent increase in sales? Why will profit increase at a greater percent than sales?

B) If Jon were to focus on the contribution margin per unit (rather than the contribution margin ratio), what would be a likely unit of service?

Solution Preview

A) Jon Cisco, the owner of RealTimeService, believes that in the coming year he can increase sales by 20 percent. Assuming the current mix of services, what will be the percentage increase in profit associates with a 20 percent increase in sales? Why will profit increase at a greater percent than sales?
Consulting Training Repair
Sales mix $500,000/$1,200,000 $400,000/$1,200,000 $300,000/$1,200,000
41.67 33.33 25.00

Variable costs:
*Salaries 250,000/500,000 160,000/400,000 180,000/300,000
50.00 40.00 60.00

*Supplies/parts 20,000/500,000 30,000/400,000 60,000/300,000
4.00 7.50 20.00

*Other ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to find the percentage increase in profit associates with a 20 percent increase in sales.

$2.19