Question

Neelon Corporation has two divisions: Southern Division and Northern Division. The following data are for the most recent operating period:

	Total Company		Southern Division			Northern Division
Sales	$	418,000	$	193,000		$	225,000
Variable expenses	$	130,880	$	79,130		$	51,750
Traceable fixed expenses	$	186,000	$	77,000		$	109,000
Common fixed expense	$	79,420	$	36,670		$	42,750

The common fixed expenses have been allocated to the divisions on the basis of sales.

What is the company's overall net operating income if it operates at the break-even points for its two divisions?

• $21,700

• $(79,420)

• $0

• $(265,420)

Answer 1

Contribution margin of southern division = Sales - Variable expenses

= 193,000 - 79,130

= $113,870

Contribution margin ratio of southern division = Contribution margin/sales

= 113,870/193,000 = 59%

Contribution margin of northern division = Sales - Variable expenses

= 225,000 - 51,750

= $173,250

Contribution margin ratio of northern division = Contribution margin/sales

= 173,000/225,000 = 77%

Break even sales of southern division = Fixed costs/Contribution margin ratio

= 77,000/59%

= $130,508

Break even sales of northern division = Fixed costs/Contribution margin ratio

= 109,000/77%

= $141,558

Income statement (At break even points of two division)

Sales - Variable expenses

Southern division 130,508 - 53,508

Northern division 141,558 - 32,558

Total company 272,066 - 86,066

Contribution margin    -Traceable fixed cost

77,000     -77,000

109,000       - 109,000

186,000 - 186,000

Segment margin	0	0	0
-Common fixed costs			- 79,420
Net income			- 79,420

Correct option is (b) i.e. (79,420)

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