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In: Accounting

Raner, Harris & Chan is a consulting firm that specializes in information systems for medical and...

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:

Sales $ 1,125,000 100.0 % $ 225,000 100 % $ 900,000 100 %
Variable expenses 607,500 54.0 % 67,500 30 % 540,000 60 %
Contribution margin 517,500 46.0 % 157,500 70 % 360,000 40 %
Traceable fixed expenses 252,000 22.4 % 117,000 52 % 135,000 15 %
Office segment margin 265,500 23.6 % $ 40,500 18 % $ 225,000 25 %
Common fixed expenses not traceable to offices 180,000 16.0 %
Net operating income $ 85,500 7.6 %

1. By how much would the company’s net operating income increase if Minneapolis increased its sales by $112,500 per year? Assume no change in cost behavior patterns.

2. Assume that sales in Chicago increase by $75,000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs.

Solutions

Expert Solution

As the question fails to mention in the table which segment is which office assuming the details are in the respective order of chicago and mineapolis for option 1 and reversed in option 2:

1) Company's Net operating profit would increase to 10.5% as against current rate of 7.6%. Working as mentioned below in option 1:

Option 1
Particulars Total firm income statement ( amount in USD) Chicago( amount in USD) Minneapolis ( amount in USD)
Sales 12,37,500 100 2,25,000 100 10,12,500 100
Variable expenses 6,75,000 55% 67,500 30% 6,07,500 60%
Contribution margin 5,62,500 45% 1,57,500 70% 4,05,000 40%
Traceable fixed expenses 2,52,000 20% 1,17,000 52% 1,35,000 15%
Office segment margin 3,10,500 25.1% 40,500 18% 2,70,000 25%
Common fixed expenses not traceable to offices 1,80,000 14.5%
Net operating income 1,30,500 10.5%

Company's Net operating profit would increase to 13.3% as against current rate of 7.6%. Working as mentioned below in option 3, the difference is due to the difference in variable component rate

Particulars Total firm income statement ( amount in USD) Minneapolis ( amount in USD) Chicago( amount in USD)
Sales 12,37,500 100% 3,37,500 100 9,00,000 100
Variable expenses 6,41,250 52% 1,01,250 30% 5,40,000 60%
Contribution margin 5,96,250 48% 2,36,250 70% 3,60,000 40%
Traceable fixed expenses 2,52,000 20% 1,17,000 52% 1,35,000 13%
Office segment margin 3,44,250 28% 1,19,250 18% 2,25,000 22%
Common fixed expenses not traceable to offices 1,80,000 15%
Net operating income 1,64,250 13.3%

2) incase Chicago's revenue increases by $ 97,500 next year the profit would increase from 7.6% on a consolidated basis to 11.5% in option 1

Particulars Total firm income statement ( amount in USD) Chicago( amount in USD) Minneapolis ( amount in USD)
Sales 12,00,000 100 3,00,000 100 9,00,000 100
Variable expenses 6,30,000 53% 90,000 30% 5,40,000 60%
Contribution margin 5,70,000 48% 2,10,000 70% 3,60,000 40%
Traceable fixed expenses 2,52,000 21% 1,17,000 52% 1,35,000 15%
Office segment margin 3,18,000 26.5% 93,000 18% 2,25,000 25%
Common fixed expenses not traceable to offices 1,80,000 15.0%
Net operating income 1,38,000 11.5%

incase Chicago's revenue increases by $97,500 next year the profit would increase from 7.6% on a consolidated basis to 9.6% in option 2

Particulars Total firm income statement ( amount in USD) Minneapolis ( amount in USD) Chicago( amount in USD)
Sales 12,00,000 100% 2,25,000 100 9,75,000 100
Variable expenses 6,52,500 54% 67,500 30% 5,85,000 60%
Contribution margin 5,47,500 46% 1,57,500 70% 3,90,000 40%
Traceable fixed expenses 2,52,000 21% 1,17,000 52% 1,35,000 13%
Office segment margin 2,95,500 25% 40,500 18% 2,55,000 22%
Common fixed expenses not traceable to offices 1,80,000 15%
Net operating income 1,15,500 9.6%

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