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	$	900,000		100.0	%		$	180,000		100	%		$	720,000		100	%
Variable expenses		486,000		54.0	%			54,000		30	%			432,000		60	%
Contribution margin		414,000		46.0	%			126,000		70	%			288,000		40	%
Traceable fixed expenses		201,600		22.4	%			93,600		52	%			108,000		15	%
Office segment margin		212,400		23.6	%		$	32,400		18	%		$	180,000		25	%
Common fixed expenses not traceable to offices		144,000		16.0	%
Net operating income	$	68,400		7.6	%

Exercise 6-16 Part 2

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $90,000 per year? Assume no change in cost behavior patterns.

Answer 1

Net operating income increase by $36,000

Working

Income Statement
			Office
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	$ 990,000	100.0%	$ 180,000	100.0%	$ 810,000	100.0%
Variable cost	$ 540,000	54.5%	$ 54,000	30.0%	$ 486,000	60.0%
Contribution margin	$ 450,000	45.5%	$ 126,000	70.0%	$ 324,000	40.0%
Traceable fixed cost	$ 201,600	20.4%	$ 93,600	52.0%	$ 108,000	13.3%
Office segment margin	$ 248,400	25.1%	$ 32,400	18.0%	$ 216,000	26.7%
Common fixed cost	$ 144,000	14.5%
Net Operating income	$ 104,400	10.5%