Question

Exercise 6-16 Working with a Segmented Income Statement; Break-Even Analysis [LO6-4, LO6-5] [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 $ 675,000 100.0 % $ 135,000 100 % $ 540,000 100 %

Variable expenses 364,500 54.0 % 40,500 30 % 324,000 60 %

Contribution margin 310,500 46.0 % 94,500 70 % 216,000 40 %

Traceable fixed expenses 151,200 22.4 % 70,200 52 % 81,000 15 %

Office segment margin 159,300 23.6 % $ 24,300 18 % $ 135,000 25 %

Common fixed expenses not traceable to offices 108,000 16.0 %

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $67,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $45,000 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

2
Increase in sales	67500
X CM ratio	40%
Net operating income increase	27000
3
	Total company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	720000	100.0%	180000	100.0%	540000	100.0%
Variable expenses	378000	52.5%	54000	30.0%	324000	60.0%
Contribution margin	342000	47.5%	126000	70.0%	216000	40.0%
Traceable fixed expenses	151200	21.0%	70200	39.0%	81000	15.0%
Office segment margin	190800	26.5%	55800	31.0%	135000	25.0%
Common fixed expenses not traceable	108000	15.0%
Net operating income	82800	11.5%