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

Office
	Total Company						Chicago						Minneapolis
Sales	$	862,500		100.0	%		$	172,500		100	%		$	690,000		100	%
Variable expenses		465,750		54.0	%			51,750		30	%			414,000		60	%
Contribution margin		396,750		46.0	%			120,750		70	%			276,000		40	%
Traceable fixed expenses		193,200		22.4	%			89,700		52	%			103,500		15	%
Office segment margin		203,550		23.6	%		$	31,050		18	%		$	172,500		25	%
Common fixed expenses not traceable to offices		138,000		16.0	%
Net operating income	$	65,550		7.6	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $86,250 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $57,500 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. 0.1234 should be entered as 12.3).)

3. Assume that sales in Chicago Increase by $57,500 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. 0.1234 should be entered as 12.3).) Segments Total Company Amount Chicago Amount Minneapolis Amount % 0 0.0 0 0.0 T 00 .00 $ 0 0.0 $ 0 0.0 0 0.0

Answer 1

Solution

Requirement 3

Net income would increase by $34,500

Working

Income Statement
			Office
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	$ 948,750	110.0%	$ 172,500	100.0%	$ 776,250	112.5%
Variable cost	$ 517,500	60.0%	$ 51,750	30.0%	$ 465,750	67.5%
Contribution margin	$ 431,250	50.0%	$ 120,750	70.0%	$ 310,500	45.0%
Traceable fixed cost	$ 193,200	22.4%	$ 89,700	52.0%	$ 103,500	15.0%
Office segment margin	$ 238,050	27.6%	$ 31,050	18.0%	$ 207,000	30.0%
Common fixed cost	$ 138,000	16.0%
Net Operating income	$ 100,050	11.6%

Requirement 4

Income increase by $40,250

Income Statement
			Office
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	$ 920,000	100.0%	$ 230,000	100.0%	$ 690,000	100.0%
Variable cost	$ 483,000	52.5%	$ 69,000	30.0%	$ 414,000	60.0%
Contribution margin	$ 437,000	47.5%	$ 161,000	70.0%	$ 276,000	40.0%
Traceable fixed cost	$ 193,200	21.0%	$ 89,700	39.0%	$ 103,500	15.0%
Office segment margin	$ 243,800	26.5%	$ 71,300	31.0%	$ 172,500	25.0%
Common fixed cost	$ 138,000	15.0%
Net Operating income	$ 105,800	11.5%

Only variable cost increase when sales increase in same proportion to increase in sales. Fixed cost remains same.