Question

Required information [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: Sales Variable expenses Contribution margin Traceable fixed expenses Office segment margin Common fixed expenses not traceable to offices Net operating income Total Company $ 600,000 100.0% 324,000 54.0% 276,000 46.0% 134,400 22.4% 141,600 23.6% 96,000 16.0% $ 45,600 7.6% Office Chicago Minneapolis $ 120,000 100% $ 480,000 100% 36,000 30% 288,000 60% 84,000 70% 192,000 40% 62,400 52% 72,000 15% $ 21,600 18% $ 120,000 25% 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 $60,000 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $40,000 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 1 decimal place (i.e. 0.1234 should be entered as 12.3).)

Answer 1

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Part 1a and 1b
		Total Company	Chicago	Minneapolis
Contribution margin ratio	a	46%	70%	40%
Fixed Expense	b	$               230,400	$         62,400	$            72,000
Break even dollar sale	b/a	$               500,870	$         89,143	$          180,000
Part 1c
Company's BEP is greater than Chicago and Minneapolis combined.
Part 2
Increase in Company's Net Income		$                  27,600
$60,000*46% CM Ratio of Company
Part 3
		Total Company		Chicago		Minneapolis
		Amount	%	Amount	%	Amount	%
Sale		$               640,000	100.0%	$          160,000	100.0%	$   480,000	100.0%
Less: Variable Expense		$               336,000	52.5%	$            48,000	30.0%	$   288,000	60.0%
Contribution Margin		$               304,000	47.5%	$          112,000	70.0%	$   192,000	40.0%
Traceable Fixed Expense		$               134,400	21.0%	$            62,400	39.0%	$     72,000	15.0%
Office Segment Margin		$               169,600	26.5%	$            49,600	31.0%	$   120,000	25.0%
Less: Common Fixed Expense		$                  96,000	15.0%
Net Operating Income		$                  73,600	11.5%