In: Accounting
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.
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% |