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.

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-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?

Answer

1-a.

The companywide break-even point is computed as follows:

Dollar sales for company to break even	=	Traceable fixed expenses + Common fixed expenses
		Overall CM ratio

	=	$201,600 + $144,000
		0.46

	=	$345,600
		0.46

=

$751,304

1-b.

The break-even point for the Chicago office is computed as follows:

Dollar sales for a segment to break even	=	Segment traceable fixed expenses
		Segment CM ratio

	=	$93,600
		0.70

=

$133,714 (rounded)

The break-even point for the Minneapolis office is computed as follows:

Dollar sales for a segment to break even	=	Segment traceable fixed expenses
		Segment CM ratio

	=	$108,000
		0.40

=

$270,000

1-c.

The sum of the segment break-even points is less than the companywide break-even point because the companywide break-even point takes into account common fixed expenses that do not affect the segment break-even calculations.

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $90,000 per year? Assume no change in cost behavior patterns.

Answer

$90,000 × 40% CM ratio = $36,000 increased contribution margin in Minneapolis. Because the fixed costs in the office and in the company as a whole will not change, the entire $36,000 would result in increased net operating income for the company.

It is not correct to multiply the $90,000 increase in sales by Minneapolis’ 25% segment margin ratio. This approach assumes that the segment’s traceable fixed expenses increase in proportion to sales, but if they did, they would not be fixed.

3. Assume that sales in Chicago increase by $60,000 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.

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