Question

DeMont Tax Services provides primarily two lines of service: accounting and tax. Accounting-related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company's fixed costs are $4,250,000. A. Calculate the revenue from each type of service that the company must achieve to break even.

Answer 1

Answer:

Accounting revenue = $7,500,000

Tax revenue  = $5,000,000

Explanation:

Contribution margin is net of Sales price and variable cost per unit.

Break-even is the level of sales at which the business have no profit no loss. At this point business only covers the the variable and fixed cost.

Average contribution = (Revenue from Accounting x Contribution of accounting services ) + (Revenue from Tax x Contribution of Tax services )

Average contribution = (60% x 30%) + (40% x 40%) = 18% + 16% = 34%

Revenue at break-even = Fixed cost / Contribution margin ratio

Revenue at break-even = $4,250,000 / 34% = $12,500,000

Accounting revenue = $12,500,000 x 60% = 7,500,000

Tax revenue = $12,500,000 x 40% = 5,000,000