Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Fixed costs are approximately $13 000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13 weeks). Now assume the contracts with customers are restructured such that the price per quarter is $300 and the contribution margin percentage is 57 per cent. Assume the tax rate is 25 per cent.
Determine the sales dollars (to the nearest $100) necessary to obtain an after-tax profit of $9600 per quarter.

Question

Quizplus · Accepted Answer

First, we need to calculate Alclear Pool & Spa's current contribution margin per quarter:

Contribution margin per quarter = (Revenue per quarter - Variable costs per quarter)

Revenue per quarter = $270 per customer x 150 customers = $40,500
Variable costs per quarter = $40,500 x 43% (100% - 57%) = $17,415

Contribution margin per quarter = $40,500 - $17,415 = $23,085

Next, we can use the contribution margin per quarter to calculate the sales dollars needed to obtain an after-tax profit of $9,600:

Target profit after tax = Target profit before tax x (1 - Tax rate)
$9,600 = Target profit before tax x (1 - 0.25)
$9,600 = Target profit before tax x 0.75
Target profit before tax = $12,800

Sales dollars needed = (Fixed costs + Target profit before tax) / Contribution margin percentage
Sales dollars needed = ($13,000 + $12,800) / 0.57
Sales dollars needed = $45,263

Therefore, the closest answer choice is B: $45,300

Alclear Pool & Spa Presently Provides a Weekly Maintenance Service