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In: Accounting

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

ekkarill92 answered 1 year ago
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