Question

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

[The following information applies to the questions displayed below.]

  

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	%

Exercise 6-16 Part 1

Questions to answer: (Round "CM ratio" to 2 decimal places and final answers to the nearest whole dollar amount.)

1-a. Compute the company wide 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?

Answer 1

ANSWER

1-a

Company wide Break even point

= Total Fixed cost / Overall contribution margin ratio

=(218,400+156,000) / (526,500/975,000)

=374,400/54%
=$202,176

Company wide Break even point =$202,176

____________________________________________

1-b

Break even point for Chicago office

= Traceable Fixed cost of segment / Contribution margin ratio of segment

=101,400/ 70%

=$70,980

Break even point for Chicago office =$70,980

Break even point for Minneapolis office

= Traceable Fixed cost of segment / Contribution margin ratio of segment

=117,000/ 40%

=$46,800

Break even point for Minneapolis office =$46,800

______________________________________________

1-c

company wide break-even point greater than, sum of the Chicago and Minneapolis break-even points

company wide break-even point =$202,176

sum of the Chicago and Minneapolis break-even points =(70,980+46,800)=$117,780

So we can say that, company wide break-even point greater than, sum of the Chicago and Minneapolis break-even points

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