Mahan Consulting is a service organization that specializes in the design, installation, and servicing of mechanical, hydraulic, and pneumatic systems. For example, some manufacturing firms, with machinery that cannot be turned off for servicing, need some type of system to lubricate the machinery during use. To deal with this type of problem for a client, Mahan designed a central lubricating system that pumps lubricants intermittently to bearings and other moving parts. The operating results for the firm for the previous year are as follows:
Sales ........... $974,880
Less: Variable expenses .... 534,234
Contribution margin ...... $440,646
Less: Fixed expenses ...... 264,300
Operating income ...... $176,346
In the coming year, Mahan expects variable costs to increase by 4 percent and fixed costs to increase by 3 percent.
Required:
1. What is the Contribution margin ratio (rounded to three significant digits) for the previous year?
2. Compute Mahan’s break-even point for the previous year in dollars.
3. Suppose that Mahan would like to see a 6 percent increase in operating income in the coming year. What percent (on average) must Mahan raise its bids to cover the expected cost increases and obtain the desired operating income? Assume that Mahan expects the same mix and volume of services in both years.
4. In the coming year, how much revenue must be earned for Mahan to earn an after-tax profit of $175,000? Assume a tax rate of 40 percent.