Question

Exercise 7-16 Working with a Segmented Income Statement; Break-Even Analysis [LO7-4, LO7-5]

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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	$	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	%

Exercise 7-16 Part 1

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 $82,500 per year? Assume no change in cost behavior patterns.

Answer 1