Question

Exercise 6-16 Working with a Segmented Income Statement; Break-Even Analysis [LO6-4, LO6-5]

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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	$	1,125,000		100.0	%		$	225,000		100	%		$	900,000		100	%
Variable expenses		607,500		54.0	%			67,500		30	%			540,000		60	%
Contribution margin		517,500		46.0	%			157,500		70	%			360,000		40	%
Traceable fixed expenses		252,000		22.4	%			117,000		52	%			135,000		15	%
Office segment margin		265,500		23.6	%		$	40,500		18	%		$	225,000		25	%
Common fixed expenses not traceable to offices		180,000		16.0	%
Net operating income	$	85,500		7.6	%

Exercise 6-16 Part 2

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $112,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by 75,000 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 one decimal place (i.e. 0.1234 should be entered in as 12.3).)

Answer 1

Answer

• Requirement 2

A	Increase in Sales of Minneapolis	$112,500
B	Contribution margin ratio of Minneapolis	40%
C = A x B	Net Operating Income would increase	$45,000

• Requirement 3 ‘a’

	Total Company		Chicago		Minneopolis
Sales	$1,200,000	100.0%	$300,000 [225000 + 75000]	100.0%	$900,000	100.0%
Variable expenses	$630,000	52.5%	$90,000 [300000 x 30%]	30.0%	$540,000	60.0%
Contribution margin	$570,000	47.5%	$210,000	70.0%	$360,000	40.0%
Traceable fixed expenses	$252,000	21.0%	$117,000	39.0%	$135,000	15.0%
Office segment margin	$318,000	26.5%	$93,000	31.0%	$225,000	25.0%
Common fixed expenses not traceable to offices	$180,000	15.0%			%
Net operating income	$138,000	11.5%			%