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	%

2. By how much would the company’s net operating income increase if Minneapolis increased its sales by $63,750 per year? Assume no change in cost behavior patterns.

Answer 1

Contribution margin ratio of Minneapolis = 40%

Increase in sales of Minneapolis = $63,750

Due to increase in sales of Minneapolis, Traceable fixed expense and common fixed expense will not increase.

Increase in net operating income = Increase in sales of Minneapolis x Contribution margin ration of Minneapolis

= 63,750 x 40%

= $25,500

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