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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	$	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	%

Required:

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

Solution:-

1-a. Compute the companywide break-even point in dollar sales:-

Company
Fixed cost	172,800
CM Ratio	46.00%
Break-even point in dollars	375,652.17

1-b. Compute the break-even point for the Chicago office and for the Minneapolis office:-

	Cicago	Minneapolis
Fixed cost	46,800	54,000
CM Ratio	70.00%	40.00%
Break-even point in dollars	66,857.14	135,000

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:-

Company wide break-even is greater than the sum of the offices because the companywidebreak-even point takes into account the common fixed expenses that do not affect the segment break-even calculations.