Renslen 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, Renslen 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 ..........$802,429
Less: Variable expenses .....430,000
Contribution margin ....$372,429
Less: Fixed expenses ....154,750
Operating income .....$217,679
In the coming year, Renslen expects variable costs to increase by 5 percent and fixed costs by 4 percent.
Required:
1. What is the Contribution margin ratio for the previous year?
2. Compute Renslen’s break-even point for the previous year in dollars.
3. Suppose that Renslen would like to see a 6 percent increase in operating income in the coming year. What percent (on average) must Renslen raise its bids to cover the expected cost increases and obtain the desired operating income? Assume that Renslen expects the same mix and volume of services in both years.
4. In the coming year, how much revenue must be earned for Renslen to earn an after-tax profit of $175,000? Assume a tax rate of 34 percent.