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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	$	975,000		100.0	%		$	195,000		100	%		$	780,000		100	%
Variable expenses		526,500		54.0	%			58,500		30	%			468,000		60	%
Contribution margin		448,500		46.0	%			136,500		70	%			312,000		40	%
Traceable fixed expenses		218,400		22.4	%			101,400		52	%			117,000		15	%
Office segment margin		230,100		23.6	%		$	35,100		18	%		$	195,000		25	%
Common fixed expenses not traceable to offices		156,000		16.0	%
Net operating income	$	74,100		7.6	%

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 $97,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $65,000 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

1a) Calculation of break even point company wide:

Breakeven sales= Total fixed expenses/ Contribution margin percentage

= (218400+156000)/46%= 813913$.

1b) Breakeven point for Chicago office:

For calculating the same we need to distribute the common fixed expenses which are not traceable to offices in proportion of the revenue they generate.

Therefore the fixed expenses not traceable will be distributed in the ratio of 195000/780000. i.e. 1:4.

Hence Breakeven point for Chicago will be= (101400+31200)/70%=189429$.

Breakeven point for Minneapolis would be=(117000+124800)/40%=613500$.

1c) Company wide break even=813913$

sum of individual break even points=802929$.

Therfore the comapny wide breakeven point sales are more than sum of Chicago and Minneapolis break even sales.

2) If the Minneapolis increase its sales by 97500$ per year, the net profit will increase by 97500*40%=39000$ since they are currently operating above the break even point.

3)

Description	Chicago	Minneapolis
Sales	260000	780000
(-) Variable cost	78000	468000
Contribution margin	182000	312000
(-) Traceable fixed expenses	101400	117000
Office segment margin	80600	195000

Total segment margin=275600

(-) Common fixed costs not traceable=156000

Net profit=119600.