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This firm has two offices—one in Paris and one in Italy. 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						Paris						Italy
Sales	$	450,000		100.0	%		$	90,000		100	%		$	360,000		100	%
Variable expenses		243,000		54.0	%			27,000		30	%			216,000		60	%
Contribution margin		207,000		46.0	%			63,000		70	%			144,000		40	%
Traceable fixed expenses		100,800		22.4	%			46,800		52	%			54,000		15	%
Office segment margin		106,200		23.6	%		$	16,200		18	%		$	90,000		25	%
Common fixed expenses not traceable to offices		72,000		16.0	%
Net operating income	$	34,200		7.6	%

2. By how much would the company’s net operating income increase if Italy increased its sales by $45,000 per year? Assume no additional fixed costs.

Answer 1

Total Net opreating income and % of Net opreating income when sales of italy branch increased by $45,000

Particlars	Paris ($)	%	Italy	%	Total ($)	%
Sales	4,50,000	100	1,35,000	100%	5,85,000	100%
Variable expense	2,43,000	54	40,500	30%	2,83,500	48%
Contribution margin	2,07,000	46	94,500	70%	3,01,500	52%
Traceble fixed expense	1,00,800	22.4	46,800	35%	1,47,600	25%
Office segement margin	1,06,200	23.6	47,700	18%	1,53,900	26%
Common fixed expenses	72,000	16			72,000	12%
net operating income	34,200	7.6			81,900	14%

Total Net opreating income and % of Net opreating income without increase of sale

Particlars	Paris ($)	%	Italy	%	Total ($)	%
Sales	4,50,000	100	90,000	100	5,40,000	100%
Variable expense	2,43,000	54	27,000	30	2,70,000	50%
Contribution margin	2,07,000	46	63,000	70	2,70,000	50%
Traceble fixed expense	1,00,800	22.4	46,800	52	1,47,600	27%
Office segement margin	1,06,200	23.6	16,200	18	1,22,400	23%
Common fixed expenses	72,000	16			72,000	13%
net operating income	34,200	7.6			50,400	9%

% Net opreating income with out increase of sales in italy branch = 9%

% Net opreating income when italy branch office sales gone up by $45,000=14%

Conclusion= The total net opreating income of the company will increased by (81900-50,400) $31,500 when company increase it sales by $45000 in italy branch

% Of increse in Net operating income will be (14%-9%) 5% overall

Workings

When company increased sales in italy branch by 45000, The variable cost also will be propotionatly change with increased Sales

Hence variable cost remain 30% of sales value even its increased in italy branch

Other fixed cost wont be changed with volume of sales , The remains in the same figures as before

Fixed costs wont be proportionatly changed with sales

*Figures are rounded off