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	$	937,500		100.0	%		$	187,500		100	%		$	750,000		100	%
Variable expenses		506,250		54.0	%			56,250		30	%			450,000		60	%
Contribution margin		431,250		46.0	%			131,250		70	%			300,000		40	%
Traceable fixed expenses		210,000		22.4	%			97,500		52	%			112,500		15	%
Office segment margin		221,250		23.6	%		$	33,750		18	%		$	187,500		25	%
Common fixed expenses not traceable to offices		150,000		16.0	%
Net operating income	$	71,250		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 $93,750 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $62,500 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

1-a.	Break even point in $ sales=Fixed cost/Contribution margin %
	Contribution margin %=Contribution margin/Sales
					Total company
	Traceable fixed cost			a	210000
	Common fixed cost			b	150000
	Total fixed cost			c=a+b	360000
	Contribution margin %			d	46%
	Break even point in $ sales			e=c/d	782609
1-b.					Chicago	Minneapolis
	Traceable fixed cost			a	97500	112500
	Contribution margin %			b	70%	40%
	Break even point in $ sales			a/b	139286	281250
1-c.	Break even point in $ sales for Chicago and minneapolis=139286+281250=$ 420536
	Break even point in $ sales for total company=$ 782609
	Company wide break-even point ($782609) greater than sum of the chicago and minneapolis break-even points ($ 420536)
2	Increase in net operating income=Increase in contribution=Increased sales*Contribution margin %=93750*40%=$ 37500
3					Total company		Chicago		Minneapolis
	Sales				1000000	100%	250000	100%	750000	100%
							(187500+62500)
	Variable expenses				525000	52.5%	75000	30%	450000	60%
							(250000*30%)
	Contribution margin				475000	47.5%	175000	70%	300000	40%
	Traceable fixed expenses				210000
	Office segment margin				265000
	Common fixed expense not traceable to
	offices				150000
	Net operating income				115000