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 below:

  

					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	%
1-a. Compute the companywide break-even point in dollar sales. (Round "CM ratio" to 2 decimal places and final answer to the nearest whole dollar amount.) 1-b. Compute the break-even point for the Chicago office and for the Minneapolis office. (Round "CM ratio" to 2 decimal places and final answers to the nearest whole dollar amount.) 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? Greater than Less than Equal to

Answer 1

1-a) Break even point of companywide

     fixed expenses = $ 218,400

     contribution margin = $448,500

      p/v ratio = contribution / sales * 100

                   = 448,500/ 975,000 * 100

                  = 46%

      break even point in dollar sales = fixed expenses/ p v ratio

                                                   = $ 218,400 / 46%

                                                   = $ 474,782.61

alternative method

break even point in units = fixed expenses/ contribution margin per unit

break even point in dollar sales = sale price per unit * break even point in units

1-b) Break even point of chicago

fixed expenses= $101,400

contribution margin = $136,500

p/v ratio = contribution/sales*100    = 136,500/195,000*100= 70%

break even point in dollar sale= fixed expenses/p v ratio

                                           = 101,400/70%

                                           =$144,857.14

alternative method

break even point in units = fixed expenses/ contribution margin per unit

break even point in dollar sales = sale price per unit * break even point in units

Break even point of minneapolis

fixed expenses = $117,000

contribution margin = $312,000

p/v ratio = contribution / sales * 100

            = 312,000/780,000 * 100

            = 40%

break even points in dollar sales = fixed expenses/p v ratio

                                               = 117,000/40%

                                               = $ 292,500

1-c) Companywide break-even point is greater than the the sum of the chicago and Minneapolits break-even point

       Companywide break-even point = $ 474,782.61

       Chicago + Minneapolis = $144,857.14 + $ 292,500 = $437,357.14

       Companywide is excess sale of $ 37,425.61 ( $ 474,782.61 - $437,357.14 )