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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: 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.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 16, Problem 38P
Textbook Problem
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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:

Chapter 16, Problem 38P, Mahan Consulting is a service organization that specializes in the design, installation, and

In the coming year, Mahan expects variable costs to increase by 4 percent and fixed costs to increase by 3 percent.

Required:

  1. 1. What is the contribution margin ratio (rounded to three significant digits) for the previous year?
  2. 2. Compute Mahan’s break-even point for the previous year in dollars.
  3. 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. 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.

1.

To determine

Compute the contribution margin ratio.

Explanation of Solution

Contribution Margin Ratio: The contribution margin ratio shows the amount of difference in the actual sales value and the variable expenses in percentage. This margin indicates that percentage which is available for sale above the fixed costs and the profit.

Compute the contribution margin ratio:

Contribution Margin ratio = 

2.

To determine

Ascertain the break-even point in sales revenue for the previous year.

3.

To determine

Compute the percentage of price rise to meet the financial proposal.

4.

To determine

Compute the revenue required to generate an after-tax profit of $175,000 with a tax rate of 40%.

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Chapter 16 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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