Question

Middleton Associates is a consulting firm that specializes in information systems for construction and landscaping companies. The firm has two offices-one in Toronto and one in Vancouver. The firm classifies the direct costs of consulting jobs as variable costs. A segmented contribution format income statement for the company's most recent year is given below: Total Company $ 800,000 100.00% 444,000 55.50 Sales Variable expenses Office Vancouver 100% $ 680,000 30 408,000 Toronto $ 120,000 36,000 100% 60 Contribution margin Traceable fixed expenses 356,000 129,200 44.50 16.15 84,000 61,200 70 51 272,000 68,000 40 10 Office segment margin 226,800 28.35 $ 22,800 19% $ 204,000 30% Common fixed expenses not traceable to offices 102,000 12.75 Operating income $ 124,800 15.60% Required: 1. By how much would the company's operating income increase if Vancouver increased its sales by $77,000 per year? Assume no change in cost behaviour patterns. Increase in operating income

Answer 1

1)Variable cost varies with output whereas fixed cost remains constant .thus increase in sales will have no impact on fixed cost

Increase in operating income =Increase in sales *contribution margin ratio of Vancouver

                = 77000 * 40%

               = $ 30800

2')

			SEGMENT
	TOTAL COMPANY	TORONTO	VANCOUVER
	Amount	%	Amount	%`	Amount	%
sales	850000	100%	170000   [120000+50000]	100%	680000	100%
Variable expense	459000	54% [459000/850000]	51000    [170000*30%]	30%	408000	60%
contribution margin	391000	46%	119000	70%	272000	40%
Traceable fixed expenses	129200	15.2%    [129200/850000]	61200	51%	68000	10%
office segment margin	261800	30.8	57800	19%	204000	30%
Common fixed cost not traceable to office	102000	12%    [102000/850000]
Operating income	159800	18.8%