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	$	675,000		100.0	%		$	135,000		100	%		$	540,000		100	%
Variable expenses		364,500		54.0	%			40,500		30	%			324,000		60	%
Contribution margin		310,500		46.0	%			94,500		70	%			216,000		40	%
Traceable fixed expenses		151,200		22.4	%			70,200		52	%			81,000		15	%
Office segment margin		159,300		23.6	%		$	24,300		18	%		$	135,000		25	%
Common fixed expenses not traceable to offices		108,000		16.0	%
Net operating income	$	51,300		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 $67,500 per year? Assume no change in cost behavior patterns.

3. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market?

4. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market?

5. In which of the markets would you recommend that the company focus its advertising campaign?

Answer 1

Break Even point - Sales is the point at which the sales of the company is exactly covering its total expenses i.e. Variable as well as Fixed Cost

Break Even point in Dollar Terms = Fixed Cost/Contribution Margin.

1. Break Even Point (Dollar terms) for Total Company = Fixed Cost / Contribution Margin

Fixed Cost = Traceable Fixed Cost + Common Fixed Cost = $151,200 + $108,000 = $259,200/-

Contribution Margin = Contribution/Sales = 46%

Breakeven Point Dollar = 259,200/46% = $563,478

Break Even Point Sales = $259,200 + $364,500 = $623,700/-

1. Break Even Point for Chicago Office = Fixed Cost/Contribution Margin

Contribution Margin = 70%, Fixed Cost = 70,200

Break Even Point Dollar = 70,200/70% = $100,286.

Break Even Point Dollar for Minneapolis Office= Fixed Cost/Contribution Margin = 81,000/40% = $202,500

1. Is the companywide break-even point greater than the sum of the Chicago and Minneapolis break-even points.

$100,286 + $202,500 = $302,786 whereas companywide break-even sales is $563,478.

2. At current Sales Level of $675,000 the company is making a profit of $51,300. Now if the sale of Minneapolis is increased by $67,500, the profit of the company will increase by $13,500.

Since the Fixed cost is not changing with the change in Sales the difference between the additional sales and additional variable cost will be additional profit.

Variable Cost per dollar sale for Minneapolis = $54,000/$67,500 = .8$

Variable cost for $67,500 additional sale = $67,500 * $0.8 = $54,000.

Additional Profit = $67,500 – $54, 0000 = $13,500.