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	$	412,500		100.0	%		$	82,500		100	%		$	330,000		100	%
Variable expenses		222,750		54.0	%			24,750		30	%			198,000		60	%
Contribution margin		189,750		46.0	%			57,750		70	%			132,000		40	%
Traceable fixed expenses		92,400		22.4	%			42,900		52	%			49,500		15	%
Office segment margin		97,350		23.6	%		$	14,850		18	%		$	82,500		25	%
Common fixed expenses not traceable to offices		66,000		16.0	%
Net operating income	$	31,350		7.6	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $41,250 per year? Assume no change in cost behavior patterns.

Answer 1

Contribution margin ration of Minneapolis = 40%

Increase in sales of Minneapolis = $41,250

Increase in contribution margin of Minneapolis = Increase in sales of Minneapolis x Contribution margin ration of Minneapolis

= 41,250 x 40%

= $16,500

Since there is no change in cost structure i.e fixed costs will not increase due to increase in sales, hence increase in net operating income will be equal to income in contribution margin.

Increase in net operating income of company = $16,500

Kindly comment if you need further assistance.

Thanks‼!