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 below:

Required:
1-a. Compute the companywide break-even point in dollar sales. (Round "CM ratio" to 2 decimal places and final answer to the nearest whole dollar amount.)
1-b. 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.)
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?
Greater than
Less than
Equal to
2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $48,750 per year? Assume no change in cost behavior patterns.
3. Refer to the original data. Assume that sales in Chicago increase by $32,500 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.1234 should be entered as 12.3)

Answer 1

Break-even points are calculated based on fixed costs and contribution margin ratio. The companywide break-even point might differ from the sum of individual office break-even points due to different cost structures. An increase in sales in Minneapolis or Chicago would affect the net operating income and require an updated income statement respectively.

Step-by-step explanation:

To analyze the given situation and answer the questions, it's essential to use concepts of break-even analysis and the relationship between revenues, variable costs, fixed costs, and profit.

Question 1-a

The companywide break-even point in dollar sales is calculated by using the formula:

Break-even point (in dollars) = Fixed Costs / Contribution Margin Ratio

Question 1-b

The break-even point for each office is also calculated using the same formula but using the fixed costs and the contribution margin ratio for each respective office.

Question 1-c

The companywide break-even point may not be equal to the sum of the break-even points of the Chicago and Minneapolis offices due to the differing cost structures and contribution margins of each office.

Question 2

The increase in the company's net operating income due to an increase in sales by Minneapolis would be the additional sales multiplied by the contribution margin ratio specific to that office.

Question 3

A new segmented income statement for the company would incorporate the increased sales in the Chicago office and would show how this affects the overall company's income, assuming fixed costs do not change.

Answer 2

Step-by-step explanation:

1a

Break-even point in dollar sales 406957 =(109200+78000)/46%

1b

Break even point

Chicago office 72429 =50700/70%

Minneapolis office 146250 =58500/40%

1c

Greater than

2

Increase in sales 48750

X CM ratio 40%

Net operating income increase 19500

3

Total company Chicago Minneapolis

Amount % Amount % Amount %

Sales 520000 100.0% 130000 100.0% 390000 100.0%

Variable expenses 273000 52.5% 39000 30.0% 234000 60.0%

Contribution margin 247000 47.5% 91000 70.0% 156000 40.0%

Traceable fixed expenses 109200 21.0% 50700 39.0% 58500 15.0%

Office segment margin 137800 26.5% 40300 31.0% 97500 25.0%

Common fixed expenses not traceable 78000 15.0%

Net operating income 59800