Question

[The following information applies to the questions displayed below.]

  

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	$	900,000		100.0	%		$	180,000		100	%		$	720,000		100	%
Variable expenses		486,000		54.0	%			54,000		30	%			432,000		60	%
Contribution margin		414,000		46.0	%			126,000		70	%			288,000		40	%
Traceable fixed expenses		201,600		22.4	%			93,600		52	%			108,000		15	%
Office segment margin		212,400		23.6	%		$	32,400		18	%		$	180,000		25	%
Common fixed expenses not traceable to offices		144,000		16.0	%
Net operating income	$	68,400		7.6	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $90,000 per year? Assume no change in cost behavior patterns.

Net operating income increase?

Answer 1

The Company's Net operating income would increase by						$36,000
						( 90000*40% )
I.e., Increase in sales multiplied by respective contribution margin ratio.
The fixed cost would not be considered because it won't change on increase in sales