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Hydro systems engineering associates, incorporated, provides consulting services to city water authorities. the consulting firm’s contribution-margin ratio is 20 percent, and its annual fixed expenses are $186,000. the firm’s income-tax rate is 40 percent. required: calculate the firm’s break-even volume of service revenue. how much before-tax income must the firm earn to make an after-tax net income of $ 54,600? what level of revenue for consulting services must the firm generate to earn an after-tax net income of $ 54,600 suppose the firm’s income-tax rate rises to 45 percent. what will happen to the break-even level of consulting service revenue?

User Jheddings
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1 Answer

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Final answer:

The break-even volume of service revenue for the consulting firm is $930,000. To achieve an after-tax net income of $54,600 with a 40% tax rate, they need a before-tax income of $91,000, hence requiring a revenue of $1,385,000.

Step-by-step explanation:

To calculate the break-even volume of service revenue for the consulting firm with a contribution-margin ratio of 20 percent and annual fixed expenses of $186,000, we use the following formula:

Break-even Revenue = Fixed Expenses / Contribution Margin Ratio. Thus, the break-even volume of service revenue = $186,000 / 0.20 = $930,000.

To determine the amount of before-tax income needed to yield an after-tax net income of $54,600 with a tax rate of 40 percent, we use the formula: Before-tax income = After-tax income / (1 - Tax rate). Therefore, before-tax income required = $54,600 / (1 - 0.40) = $91,000.

The level of revenue for consulting services the firm needs to generate to earn an after-tax net income of $54,600 can be calculated using the formula:

Revenue for target profit = (Fixed Expenses + Target Profit before Taxes) / Contribution Margin Ratio. Revenue = ($186,000 + $91,000) / 0.20 = $1,385,000.

Finally, if the firm's income-tax rate rises to 45 percent, the before-tax income needed to achieve the same after-tax income would increase, and hence the break-even level of consulting service revenue would also rise given that a higher portion of their profit would be paid as tax.

User Adam Heeg
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