Question: Top Motor Corporation is projecting average revenue of $4.00 per mile and variable costs of $3.50 per mile for the year 2015. Fixed costs are budgeted at $2,000,000. The tax rate for Top Motor is 40%. Management wants to make an after-tax profit of $500,000.
Required: 1. Compute the contribution margin per mile and the contribution margin ratio.
2. Compute the break-even in miles and revenue taking into consideration projected aftertax profit and taxes.
3. Presently, Top Motor buys the liability insurance at a fixed premium of $10,000 per month. It is a part of thefixed costs. They have received a proposal from an agency to write the insurance at 10 cents per mile in lieu ofthe fixed premium. Calculate the new break-even in miles and revenue taking into consideration taxes andprofits.
4. Should they make the change? Discuss rationale.