2-29 Income Taxes and Cost-Volume-Profit Analysis

Study Appendix 2B. Suppose Meola Security Company has a 20% income tax rate, a

contribution-margin ratio of 30%, and fixed costs of $440,000, What sales volume is necessary to achieve an after-tax income of $80,000?

2-30 Fixed Costs and Relevant Range

Guiterro Systems Group (GG) has a substantial year-to-year fluctuation in billings

to clients. Top management has the following policy regarding the employment of key

professional personnel:

If Gross Annual

Billings Are

$2,000,000 or less

$2,000,001-2,400,000

$2,400,001-2,800,000

Number of Persons

to be Employed

10

11

12

Key Professional

Annual Salaries

and Related Expenses

$1,000.000

1,100,000

1,200,000

Top management believes that a minimum of ten individuals should be retained for

a year or more even if billings drop drastically below $2 million.

For the past five years, gross annual billings for GSG have fluctuated between

$2,020,000 and $2,380,000. Expectations for next year are that gross billings will

be between $2,100,000 and $2,300,000. What amounts should be budgeted for key

professional personnel? Graph the relationships on an annual basis, using the two

approaches illustrated in Exhibit 2-2. Indicate the relevant range on each graph. You

need not use graph paper; simply approximate the graphical relationships