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	$	1,050,000		100.0	%		$	210,000		100	%		$	840,000		100	%
Variable expenses		567,000		54.0	%			63,000		30	%			504,000		60	%
Contribution margin		483,000		46.0	%			147,000		70	%			336,000		40	%
Traceable fixed expenses		235,200		22.4	%			109,200		52	%			126,000		15	%
Office segment margin		247,800		23.6	%		$	37,800		18	%		$	210,000		25	%
Common fixed expenses not traceable to offices		168,000		16.0	%
Net operating income	$	79,800		7.6	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $105,000 per year? Assume no change in cost behavior patterns.

Answer 1

Answer. Minneapolis Contribution Margin is 40% Hence, an increase in sales by $105.000 will increase the contribution margin by $105,000 x 40% - $ 42,000 As there is no increase in the fixed cost, the entire $40,000 would result in increased net operating income. :: The Net operating income increased by $ 42,000.