Raner, Harris & Chan is a consulting firm that specializes in information system
ID: 2559509 • Letter: R
Question
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:
1. Compute the companywide break-even point in dollar sales. (Round "CM ratio" to 2 decimal places.)
2. Compute the break-even point for the Chicago office and for the Minneapolis office. (Round "CM ratio" to 2 decimal places and final answers to the nearest whole dollar amount.)
3. By how much would the company's net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns.
4. Assume that sales in Chicago increase by $50,000 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)
Office Total Company Chicago Minneapolis Sales $ 450,000 100 % $ 150,000 100 % $ 300,000 100 % Variable expenses 225,000 50 % 45,000 30 % 180,000 60 % Contribution margin 225,000 50 % 105,000 70 % 120,000 40 % Traceable fixed expenses 126,000 28 % 78,000 52 % 48,000 16 % Office segment margin 99,000 22 % $ 27,000 18 % $ 72,000 24 % Common fixed expenses not traceable to offices 63,000 14 % Net operating income $ 36,000 8 %Explanation / Answer
1. Companywide break-even point in dollar sales: $378000
Break-even point in dollar sales = Total fixed costs / Contribution margin ratio
Total fixed costs = Traceable fixed expenses + Common fixed expenses = $126000 + $63000 = $189000
Break-even point in dollar sales = $189000 / 50% = $378000
2. Break-even point for:
Chicago Office: $78000 / 70% = $111428.57 = $111429
Minneapolis Office: $48000 / 40% = $120000
3. Increase in company's net operating income: $30000
Increase in sales of Minneapolis office = $75000
Contribution margin ratio = 40%
Increase in contribution = $75000 x 40% = $30000
Increase in net operating income = $30000
Fixed costs being constant, the increase in net operating income will be equal to the increase in contribution margin.
4a.
Segments Total Company Chicago Minneapolis Amount % Amount % Amount % Sales 500000 100.0 200000 100.0 300000 100.0 Variable expenses 240000 48.0 60000 30.0 180000 60.0 Contribution margin 260000 52.0 140000 70.0 120000 40.0 Traceable fixed expenses 126000 25.2 78000 39.0 48000 16.0 Office segment margin 134000 26.8 62000 31.0 72000 24.0 Common fixed expenses not traceable to segments 63000 12.6 Net operating income 71000 14.2Related Questions
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