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	$	825,000		100.0	%		$	165,000		100	%		$	660,000		100	%
Variable expenses		445,500		54.0	%			49,500		30	%			396,000		60	%
Contribution margin		379,500		46.0	%			115,500		70	%			264,000		40	%
Traceable fixed expenses		184,800		22.4	%			85,800		52	%			99,000		15	%
Office segment margin		194,700		23.6	%		$	29,700		18	%		$	165,000		25	%
Common fixed expenses not traceable to offices		132,000		16.0	%
Net operating income	$	62,700		7.6	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $82,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $55,000 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 .1234 should be entered as 12.3))

Answer 1

a. Prepare a new segmented income statement for the company. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

						Office
	Total Company						Chicago						Minneapolis
Sales	$	907,500		100.0	%		$	165,000		100	%		$	742,500		100	%
Variable expenses		495,000		54.5	%			49,500		30	%			445,500		60	%
Contribution margin		412,500		45.5	%			115,500		70	%			297,000		40	%
Traceable fixed expenses		184,800		20.4	%			85,800		52	%			99,000		15	%
Office segment margin		227,700		25.1	%		$	29,700		18	%		$	198,000		25	%
Common fixed expenses not traceable to offices		132,000		14.5	%
Net operating income	$	95,700		10.5	%

a. Prepare a new segmented income statement for the company. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

						Office
	Total Company						Chicago						Minneapolis
Sales	$	880,000		100.0	%		$	220,000		100	%		$	660,000		100	%
Variable expenses		462,000		52.5	%			66,000		30	%			396,000		60	%
Contribution margin		418,000		47.5	%			154,000		70	%			264,000		40	%
Traceable fixed expenses		184,800		21.0	%			85,800		52	%			99,000		15	%
Office segment margin		233,200		26.5	%		$	68,200		18	%		$	165,000		25	%
Common fixed expenses not traceable to offices		132,000		15.0	%
Net operating income	$	101,200		11.5	%