Question

Middleton Associates is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices—one in Toronto and one in Vancouver. The firm classifies the direct costs of consulting jobs as variable costs. A segmented contribution format income statement for the company’s most recent year is given below:

					Office
	Total Company				Toronto				Vancouver
Sales	$	1,000,000	100.00	%	$	300,000	100	%	$	700,000	100	%
Variable expenses		490,000	49.00			105,000	35			385,000	55
Contribution margin		510,000	51.00			195,000	65			315,000	45
Traceable fixed expenses		280,000	28.00			168,000	56			112,000	16
Office segment margin		230,000	23.00		$	27,000	9	%	$	203,000	29	%
Common fixed expenses not     traceable to offices		84,000	8.40
Operating income	$	146,000	14.60	%

Required:
1. By how much would the company’s operating income increase if Vancouver increased its sales by $80,000 per year? Assume no change in cost behaviour patterns.

2-a. Refer to the original data. Assume that sales in Toronto increase by $120,000 next year and that sales in Vancouver remain unchanged. Assume no change in fixed costs. Prepare a new segmented income statement for the company. (Round your percentage answers to 2 decimal places.)

Answer 1

1
Increase in sales	80000
X Contribution margin ratio	45%
Net operating income increase	36000
2
	Total company		Toronto		Vancouver
	Amount	%	Amount	%	Amount	%
Sales	1120000	100.00%	420000	100.00%	700000	100.00%
Variable expenses	532000	47.50%	147000	35.00%	385000	55.00%
Contribution margin	588000	52.50%	273000	65.00%	315000	45.00%
Traceable fixed expenses	280000	25.00%	168000	40.00%	112000	16.00%
Office segment margin	308000	27.50%	105000	25.00%	203000	29.00%
Common fixed expenses not traceable	84000	7.50%
Net operating income	224000	20.00%