Kline 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, Kline 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, Kline 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 Kline’s break-even point for the previous year in dollars.
3. Suppose that Kline would like to see a 6 percent increase in operating income in the coming year. What percent (on average) must Kline raise its bids to cover the expected cost increases and obtain the desired operating income? Assume that Kline expects the same mix and volume of services in both years.
4. In the coming year, how much revenue must be earned for Kline to earn an after-tax profit of $175,000? Assume a tax rate of 34 percent.

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Sales Less: Variable expenses Contribution margin Less: Fixed expenses Operating income $802,429 430,000 $372,429 154,750 $217,679