Question

Required information [The following information applies to the questions displayed below.) 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: Sales Variable expenses Contribution margin Traceable fixed expenses Office segment margin Common fixed expenses not traceable to offices Net operating income Total Company $ 600,000 100.0% 324,000 54.0% 276,000 46.0% 134,400 22.4% 141,600 23.67 96,000 16.0% $ 45,600 7.6% Office Chicago Minneapolis $ 120,000 100% $ 480,000 100% 36,000 30% 288,000 60% 84,000 70% 192,000 40% 62,400 52% 72,000 157 $ 21,600 18% $ 120,000 25% 2. By how much would the company's net operating income increase if Minneapolis increased its sales by $60,000 per year? Assume no change in cost behavior patterns. Net operating income increase

Answer 1

$24,000

($60,000 (Increase in sales) * 40% (Contribution Margin) = $24,000)

(As fixed expenses are constant there is no additional fixed expenses and we will directly multiply the increase in sales into the contribution margin percentage to get the additional income.)