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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:

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 $97,500 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $65,000 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).)

Office Total Company Chicago Minneapolis Sales $ 975,000 100.0 % $ 195,000 100 % $ 780,000 100 % Variable expenses 526,500 54.0 % 58,500 30 % 468,000 60 % Contribution margin 448,500 46.0 % 136,500 70 % 312,000 40 % Traceable fixed expenses 218,400 22.4 % 101,400 52 % 117,000 15 % Office segment margin 230,100 23.6 % $ 35,100 18 % $ 195,000 25 % Common fixed expenses not traceable to offices 156,000 16.0 % Net operating income $ 74,100 7.6 %

Explanation / Answer

1a) Calculation of break even point company wide:

Breakeven sales= Total fixed expenses/ Contribution margin percentage

= (218400+156000)/46%= 813913$.

1b) Breakeven point for Chicago office:

For calculating the same we need to distribute the common fixed expenses which are not traceable to offices in proportion of the revenue they generate.

Therefore the fixed expenses not traceable will be distributed in the ratio of 195000/780000. i.e. 1:4.

Hence Breakeven point for Chicago will be= (101400+31200)/70%=189429$.

Breakeven point for Minneapolis would be=(117000+124800)/40%=613500$.

1c) Company wide break even=813913$

sum of individual break even points=802929$.

Therfore the comapny wide breakeven point sales are more than sum of Chicago and Minneapolis break even sales.

2) If the Minneapolis increase its sales by 97500$ per year, the net profit will increase by 97500*40%=39000$ since they are currently operating above the break even point.

3)

Total segment margin=275600

(-) Common fixed costs not traceable=156000

Net profit=119600.

Description Chicago Minneapolis Sales 260000 780000 (-) Variable cost 78000 468000 Contribution margin 182000 312000 (-) Traceable fixed expenses 101400 117000 Office segment margin 80600 195000

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