Breakeven With Income Taxes

Hydro Systems Engineering provides consulting services to city water authorities.The firmsí contribution margin ratio is 20% and its annual fixed costs amount to $120,000.The income tax rate is 40%.


  1. Calculate the companyís breakeven revenue.
  2. How much before-tax income must the company make to earn after tax income of $48,000?
  3. What level of revenue must the firm generate to earn an after-tax net income of $48,000?
  4. Suppose the firmís income tax rate rises to 45%.What will happen to the breakeven level of consulting revenue?(Trick question)

Operating Leverage Problem

Pacifica Corporation had the following data available:


Sales Revenue


Manufacturing Costs


††† Fixed

†† $500,000

††† Variable


Selling Costs


††† Fixed

†††† $50,000

††† Variable

†† $100,000

Administrative Costs


††† Fixed

†† $120,000

††† Variable

†††††† 30,000

1.Prepare a traditional income statement and a contribution income statement.



2. What is the companyís operating leverage factor at this volume of sales?


3.Suppose sales increase by 10%.What will be the percentage increase in net income?