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	$	450,000		100	%		$	150,000		100	%		$	300,000		100	%
Variable expenses		225,000		50	%			45,000		30	%			180,000		60	%
Contribution margin		225,000		50	%			105,000		70	%			120,000		40	%
Traceable fixed expenses		126,000		28	%			78,000		52	%			48,000		16	%
Office segment margin		99,000		22	%		$	27,000		18	%		$	72,000		24	%
Common fixed expenses not traceable to offices		63,000		14	%
Net operating income	$	36,000		8	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns.

Net operating income increase =

3. Assume that sales in Chicago increase by $50,000 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. (Round your percentage answers to 1 decimal place (i.e. 0.1234 should be entered as 12.3).)

Segments
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
	0	0.0	0	0.0	0	0.0
	0	0.0	$0	0.0	$0	0.0
	$0	0.0

Answer 1

2
Increase in sales	75000
Contribution margin ratio	40%
Net operating income increase	30000
3
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	500000	100.0%	200000	100.0%	300000	100.0%
Variable expenses	240000	48.0%	60000	30.0%	180000	60.0%
Contribution margin	260000	52.0%	140000	70.0%	120000	40.0%
Traceable fixed expenses	126000	25.2%	78000	39.0%	48000	16.0%
Office segment margin	134000	26.8%	62000	31.0%	72000	24.0%
Common fixed expenses not traceable to offices	63000	12.6%
Net operating income	71000	14.2%