Falcon Environmental Services, Inc. provides consulting services to power plants . The consulting firm's contribution-margin ratio is 15 percent, and its annual fixed expenses are $135,000. The firm's income-tax rate is 35 percent.Required: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 $65,000?3.What level of revenue for consulting services must the firm generate to earn an after-tax net income of $65,000?4.Suppose the firm's income-tax rate rises to 45 percent. Explain what will happen to the break-even level of consulting service revenue.
What will be an ideal response?
1. Break-even volume of service revenue = fixed expenses ÷ contribution margin ratio = $135,000 ÷ .15 = $900,000
2. Target before tax income = Target after tax net income ÷ (1-tax rate) = $65,000 ÷ (1 - 0.35) = $100,000.
3. Service revenue required to earn target after-tax income of $65,000 = $135,000 + [$65,000 ÷ (1 - 0.35)] / 0.15 = $235,000 / 0.15 = $1,566,667
4. A change in the tax rate will have no effect on the firm's break-even point. At the break-even point, the firm has no profit and does not have to pay any income taxes.
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