Question

 

Exercise 6-16 Working with a Segmented Income Statement; Break-Even Analysis [LO6-4, LO6-5]

Raner, Harris & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company’s most recent year is given:

							Office
	Total Company						Chicago						Minneapolis
Sales	$	562,500		100.0	%		$	112,500		100	%		$	450,000		100	%
Variable expenses		303,750		54.0	%			33,750		30	%			270,000		60	%
Contribution margin		258,750		46.0	%			78,750		70	%			180,000		40	%
Traceable fixed expenses		126,000		22.4	%			58,500		52	%			67,500		15	%
Office segment margin		132,750		23.6	%		$	20,250		18	%		$	112,500		25	%
Common fixed expenses not traceable to offices		90,000		16.0	%
Net operating income	$	42,750		7.6	%

Exercise 6-16 Part 2

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $56,250 per year? Assume no change in cost behavior patterns.

Part 3.

Raner, Harris & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company’s most recent year is given:

							Office
	Total Company						Chicago						Minneapolis
Sales	$	562,500		100.0	%		$	112,500		100	%		$	450,000		100	%
Variable expenses		303,750		54.0	%			33,750		30	%			270,000		60	%
Contribution margin		258,750		46.0	%			78,750		70	%			180,000		40	%
Traceable fixed expenses		126,000		22.4	%			58,500		52	%			67,500		15	%
Office segment margin		132,750		23.6	%		$	20,250		18	%		$	112,500		25	%
Common fixed expenses not traceable to offices		90,000		16.0	%
Net operating income	$	42,750		7.6	%

3. Assume that sales in Chicago increase by $37,500 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs.

a. Prepare a new segmented income statement for the company. (Round your percentage answers to 1 decimal place (i.e. 0.1234 should be entered as 12.3).)

 

Answer 1

2)

Net operating income increase       = Increase in Sales x Contribution margin ratio       = $ 56,250 x 40%       = $ 22,500

Net operating income increases by $ 22,500

Answer:
3)
Segmented income statement				Segments
	Total Company (A +B )		Chicago (A)		Minneapolis (B)
	Amount	%	Amount	%	Amount	%
Sales	$ 600,000	100%	$ 150,000 ($ 112,500 + $ 37,500)	100%	$ 450,000	100%
Less: Variable expenses	($ 315,000)	52.50% ( $ 315,000 / $ 600,000 )	($ 45,000) ( $ 150,000 x 30% )	30%	($ 270,000)	60%
Contribution margin	$ 285,000	47.50% ( $ 285,000 / $ 600,000)	$ 105,000	70%	$ 180,000	40%
Less: Traceable fixed expenses	($ 126,000)	21%	($ 58,500)	30%	($ 67,500)	15%
Office Segment Margin	$ 159,000	26.50%	$ 46,500	31%	$ 112,500	25%
Less:Common Fixed expense not traceable to offices	($ 90,000)	15%
Net operating income	$ 69,000	11.5% ( $ 69,000 / $ 600,000)