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:

							Office
	Total Company						Chicago						Minneapolis
Sales	$	937,500		100.0	%		$	187,500		100	%		$	750,000		100	%
Variable expenses		506,250		54.0	%			56,250		30	%			450,000		60	%
Contribution margin		431,250		46.0	%			131,250		70	%			300,000		40	%
Traceable fixed expenses		210,000		22.4	%			97,500		52	%			112,500		15	%
Office segment margin		221,250		23.6	%		$	33,750		18	%		$	187,500		25	%
Common fixed expenses not traceable to offices		150,000		16.0	%
Net operating income	$	71,250		7.6	%

Required:

1-a. Compute the companywide break-even point in dollar sales.

1-b. Compute the break-even point for the Chicago office and for the Minneapolis office.

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?

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $93,750 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $62,500 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs.

a. Prepare a new segmented income statement for the company. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))

Answer 1

Answer to Part 1-a.

Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Fixed Cost = $210,000 + $150,000 = $360,000
Break Even Point (in Dollar Sales) = 360,000 / 0.46
Break Even Point (in Dollar Sales) = $782,608.70

Answer to Part 1-b.

For Chicago:
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Break Even Point (in Dollar Sales) = 97,500 / 0.70
Break Even Point (in Dollar Sales) = $139,285.71

For Minneapolis:
Break Even Point (in Dollar Sales) = Fixed Cost / Contribution Margin Ratio
Break Even Point (in Dollar Sales) = 112,500 / 0.40
Break Even Point (in Dollar Sales) = $281,250

Answer to Part 1-c.

The Companywide Break-even point i.e. $782,608.70 is greater than the sum of Break Even point of Chicago i.e. $139,285.71 and Minneapolis i.e. $281,250.

Answer to Part 2.

Increase in Net Operating Income = Increase in Sales * Contribution Margin Ratio
Increase in Net Operating Income = $93,750 * 40%
Increase in Net Operating Income = $37,500