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	$	637,500		100.0	%		$	127,500		100	%		$	510,000		100	%
Variable expenses		344,250		54.0	%			38,250		30	%			306,000		60	%
Contribution margin		293,250		46.0	%			89,250		70	%			204,000		40	%
Traceable fixed expenses		142,800		22.4	%			66,300		52	%			76,500		15	%
Office segment margin		150,450		23.6	%		$	22,950		18	%		$	127,500		25	%
Common fixed expenses not traceable to offices		102,000		16.0	%
Net operating income	$	48,450		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

1. a)

Companywide fixed cost = Traceable fixed expenses + Common fixed expenses not traceable to offices

= 142,800+102,000

= $244,800

Break even point in dollars sales = Fixed costs / Contribution margin rate

= 244,800/46%

= $532,173.91

b.

Fixed cost of Chicago office = $66,300

Contribution margin rate for Chicago office = 70%

Break even point in dollars sales = Fixed costs / Contribution margin rate

= 66,300 /70%

= $94,714.39

Fixed cost of Minneapolis office = $76,500

Contribution margin rate for Minneapolis office = 40%

Break even point in dollars sales = Fixed costs / Contribution margin rate

= 76,500/40%

= $191,250

c.

Companywide breake even point is greater than the sum of the Chicago and Minneapolis break even points.