Question

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

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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	$	675,000		100.0	%		$	135,000		100	%		$	540,000		100	%
Variable expenses		364,500		54.0	%			40,500		30	%			324,000		60	%
Contribution margin		310,500		46.0	%			94,500		70	%			216,000		40	%
Traceable fixed expenses		151,200		22.4	%			70,200		52	%			81,000		15	%
Office segment margin		159,300		23.6	%		$	24,300		18	%		$	135,000		25	%
Common fixed expenses not traceable to offices		108,000		16.0	%
Net operating income	$	51,300		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 $67,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $45,000 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

Revised Income Statement with Accomdating both features of 2 and 3.

	Total Company	%	Chicago	%	Minneapolis	%
Sales	787500	100%	585000	10000%	202500	100%
Variable Expenses	411750	52.29%	351000	60%	60750	30%
Contribution Margin	375750	47.71%	234000	40%	141750	70%
Traceable Fixed Expenses	186300	23.66%	81000	14%	105300	52%
Office Segment Margin	189450	24.06%	153000	26%	36450	18%
Common Fixed Expense	108000	13.71%
Net Operating Expenses	81450	10.34%

		Total Company	%	Chicago	%	Minneapolis	%
	Sales	675000	100.0%	540000	100%	135000	100
	Variable Expenses	364500	54.0%	324000	60%	40500	30%
	Contribution Margin	310500	46.0%	216000	40%	94500	70%
	Traceable Fixed Expenses	151200	22.4%	81000	15%	70200	52%
	Office Segment Margin	159300	23.6%	135000	25%	24300	18%
	Common Fixed Expense	108000	16.0%
	Net Operating Expenses	51300	7.6%
2. (a)	If Sale of Minnepolis increase by 67500$ and no change in cost behaving pattern it measn that although Sale is increased but cost pertaing to that sale also casue same proposrtion of Cost as earlier. No Change in Common Fixed Cost.
		Minneapolis	%
	Sales	67500	100
	Variable Expenses	20250	0.30
	Contribution Margin	47250	0.70
	Traceable Fixed Expenses	35100	0.52
	Office Segment Margin	12150	0.18
	Changes in Total Company Details are as Follow
	Net Operating income Before Change is	51300$
	Add: office Segment Margin	12150$
			63450
	% Change is 63450$ / 675000$+67500$	8.54%

3.  

3. If Sale is increased by 45000$ in Chicago, but No Change in Fixed Cost
	Chicago	%
Sales	45000	100
Variable Expenses	27000	60%
Contribution Margin	18000	40%
Traceable Fixed Expenses	0	15%
Office Segment Margin	18000	25%
Here Changes in Fixed cost is not taken into account with % behaviour as there is no change in Fixed cost behaviour