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 $ 462,000 100 % $ 156,000 100 % $ 306,000 100 % Variable expenses 233,000 50 % 49,000 31 % 184,000 60 % Contribution margin 229,000 50 % 107,000 69 % 122,000 40 % Traceable fixed expenses 127,600 28 % 78,800 51 % 56,000 18 % Office segment margin 101,400 22 % $ 28,200 18 % $ 66,000 22 % Common fixed expenses not traceable to offices 65,000 14 % Net operating income $ 36,400 8 %

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $77,000 per year? Assume no change in cost behavior patterns.

3. Assume that sales in Chicago increase by $52,000 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.

Answer 1

2.

Contribution margin ratio of Minneapolis = 40%

Increase in net operating income = $77,000 * 40% = $30,800

3.

Contribution Format Segmented Income Statement
	Total Company		Chicago		Minneapolis
Sales	$514,000	100%	$208,000	100%	$306,000	100%
Variable expenses	248,480	48%	64,480	31%	184,000	60%
Contribution margin	265,520	52%	143,520	69%	122,000	40%
Traceable fixed expenses	127,600	25%	78,800	38%	56,000	18%
Office segment margin	137,920	27%	64,720	31%	66,000	22%
Common fixed expenses	65,000	13%
Net operating income	$72,920	14%