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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	$	637,500		100.0	%		$	127,500		100	%		$	510,000		100	%
Variable expenses		344,250		54.0	%			38,250		30	%			306,000		60	%
Contribution margin		293,250		46.0	%			89,250		70	%			204,000		40	%
Traceable fixed expenses		142,800		22.4	%			66,300		52	%			76,500		15	%
Office segment margin		150,450		23.6	%		$	22,950		18	%		$	127,500		25	%
Common fixed expenses not traceable to offices		102,000		16.0	%
Net operating income	$	48,450		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?

Answer 1

Break-even Point (Dollar Sales) = (Total Fixed costs / Contribution Margin Ratio)

1-a) Company wide Break-even Point

Here, the company wide Fixed costs include Common fixed expenses not traceable to offices also

Total Fixed costs = Traceable fixed expenses + Common fixed expenses not traceable to offices

                                = $142,800 + $102,000

                                = $244,800

Contribution Margin Ratio = [(Sales - Variable Cost) / Sales ] * 100

                                                =[($637,500 - $344,250) / $637,500 ] *100

                                                = ($293,250 / $637,500) * 100

                                                = 46%

Break-even Point (Dollar Sales) = (Total Fixed costs / Contribution Margin Ratio)

                                                          = $244,800 / 46%

                                                          = $532,175

1-b) Break-even point for Chicago Office and Minneapolis office

The fixed expenses of Branch offices include only those expenses which are traceable to them.

Break-even Point (Dollar Sales) Chicago Office = (Total Fixed costs / Contribution Margin Ratio)

                                                                                      = $66,300 / 70%

                                                                                      = $94,715

Break-even Point (Dollar Sales) Minneapolis Office = (Total Fixed costs / Contribution Margin Ratio)

                                                                                             = $76,500 / 40%

                                                                                             = $191,250

1-c)

The Break-even point for the both the offices = $94,715 + $191,250 = $285,965

Break-even point Company wide = $532,175

So, the Company Wide Break-even is greater than the sum of the Chicago and Minneapolis break-even points.This is because of Common fixed expenses not traceable to offices.