Question

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	$	450,000		100	%		$	150,000		100	%		$	300,000		100	%
Variable expenses		225,000		50	%			45,000		30	%			180,000		60	%
Contribution margin		225,000		50	%			105,000		70	%			120,000		40	%
Traceable fixed expenses		126,000		28	%			78,000		52	%			48,000		16	%
Office segment margin		99,000		22	%		$	27,000		18	%		$	72,000		24	%
Common fixed expenses not traceable to offices		63,000		14	%
Net operating income	$	36,000		8	%

Required:

1-a. Compute the companywide break-even point in dollar sales.

1-b. Compute the break-even point for the Chicago office and for the Minneapolis office.

1-c. Is the companywide break-even point greater than, less than, or equal to the sum of the Chicago and Minneapolis break-even points?

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $50,000 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

Solution 1a:

Company wide breakeven point in dollar sales = Total fixed expenses / Weighted average contribution margin ratio = ($126,000+ $63,000) / 50% = $378,000

Solution 1b:

Breakeven point for Chicago office = Traceable fixed expense of chicago office / Contribution margin ratio of chicago office = $78,000/70% = $111,429

Break even point for Minneapolis office = Traceable fixed expense of minneapolis office / Contribution margin ratio of minneapolis office = $48,000/40% = $120,000

Solution 1c:

Sum of breakeven point of chicago office and Minneapolis office = $111,429 + $120,000 = $231,429

Companywide breakeven point = $378,000

Therefore companywide break-even point is greater than,sum of the Chicago and Minneapolis break-even points.

Solution 2:

If Minneapolis increased its sales by $75,000 per year then increse in net operating income of the company = $75,000 * Contribution margin ratio of Minneapolis = $75,000 * 40% = $30,000

Solution 3:

Segment Income Statement
			Office
Particulars	Total Company		Chicago		Minneapolis
Sales	$500,000.00	100.0%	$200,000.00	100.0%	$300,000.00	100.0%
Variable expenses	$240,000.00	48.0%	$60,000.00	30.0%	$180,000.00	60.0%
Contribution margin	$260,000.00	52.0%	$140,000.00	70.0%	$120,000.00	40.0%
Traceable fixed expenses	$126,000.00	25.2%	$78,000.00	39.0%	$48,000.00	16.0%
Office segment margin	$134,000.00	26.8%	$62,000.00	31.0%	$72,000.00	24.0%
Common fixed expenses not traceable to offices	$63,000.00	12.6%
Net operating income	$71,000.00	14.2%