Question

Required information Exercise 4-16 (Algo) Working with a Segmented Income Statement; Break-Even Analysis [LO4-4, LO4-5] [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 $ 1,012,500 100.0 % $ 202,500 100 % $ 810,000 100 % Variable expenses 546,750 54.0 % 60,750 30 % 486,000 60 % Contribution margin 465,750 46.0 % 141,750 70 % 324,000 40 % Traceable fixed expenses 226,800 22.4 % 105,300 52 % 121,500 15 % Office segment margin 238,950 23.6 % $ 36,450 18 % $ 202,500 25 % Common fixed expenses not traceable to offices 162,000 16.0 % Net operating

income $ 76,950 7.6 % Exercise 4-16 (Algo) Part 1 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?

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $101,250 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $67,500 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).)

Answer 1

Break-even point = Fixed expenses/Contribution margin ratio
1a
Break-even point in dollar sales	845217	=(226800+162000)/46%
1b
	Break even point
Chicago office	150429	=105300/70%
Minneapolis office	303750	=121500/40%
1c
Greater than
2
Increase in sales	101250
X CM ratio	40%
Net operating income increase	40500
3
	Total company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	1080000	100.0%	270000	100.0%	810000	100.0%
Variable expenses	567000	52.5%	81000	30.0%	486000	60.0%
Contribution margin	513000	47.5%	189000	70.0%	324000	40.0%
Traceable fixed expenses	226800	21.0%	105300	39.0%	121500	15.0%
Office segment margin	286200	26.5%	83700	31.0%	202500	25.0%
Common fixed expenses not traceable	162000	15.0%
Net operating income	124200	11.5%