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Required information [The following information applies to the questions displayed below.] This firm has two...
Required information
[The following information applies to the questions displayed below.]
This firm has two offices—one in Paris and one in Italy. 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 | Paris | Italy | |||||||||||||||
| 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 | % | |||||||||||||
Required:
1-a. Compute the companywide break-even point in dollar sales.
1-b. Compute the break-even point for the Paris office and for the Italy office.
2. By how much would the company’s net operating income increase if Italy increased its sales by $112,500 per year? Assume no additional fixed costs.
Solutions
Expert Solution
| PARTICULARS | paris | italy | ||
| sales | 1125000 | 225000 | ||
| -variable expenses | (607500) | (67500) | ||
| contribution | 517500 | 157500 | ||
| -traceable fixed expenses | (252000) | (117000) | ||
| -office segment margin | 265500 | 40500 | ||
| -common fixed expenses | (180000) | |||
| net profit | 85500 | |||
CM RATIO OF COMPANY=Group contribution/Group Sales*100
GROUP CM RATIO
=(517500+157500/1125000+225000)*100
=50%
break even point of co. as a whole=total fixed expenses/group CM RATIO
break even point for company as a whole=252000+117000+180000=549000
=549000/0.50=$1098000
2. BEP CALCULATION:
CM RATIO= CONTRIBUTION/SALES*100
| PARIS | ITALY |
| 517500/1125000*100=46% | 157500/225000*100=70% |
BEP
| PARIS | ITALY |
| (252000+180000)/46%=$939130.434 | 117000/70%=650000=$167142.857 |
3. IF SALES INCREASE BY 112500PER YEAR IN ITALY,
| PARTICULARS | PARIS | ITALY |
| SALES | 1125000 | 225000+112500=337500 |
| -VARIABLE EXPENSES | (607500) | 337500*0.30=(101250) |
| CONTRIBUTION | 517500 | 236250 |
| TRACEABLE FIXED EXPENSES | (252000) |
(117000) |
| COMMON FIXED EXPENSES | (180000) | |
| NET OPERATING INCOME | 85500 | 119250 |
INCREASE IN COMPANY'S NET OPERATING INCOME=85500+119250-85500-40500
=$78750
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