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:

							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	%

Exercise 6-16 Part 2

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.

Answer 1

Revised income statement after increase in sales is as follows:-

Increase in net operating income is :
= Revised operating income - Previous operating income
= $113,100 - $74,100
= $39,000