Question

[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: Office Total Company Chicago Minneapolis Sales $ 450,000 100.0 % $ 90,000 100 % $ 360,000 100 % Variable expenses 243,000 54.0 % 27,000 30 % 216,000 60 % Contribution margin 207,000 46.0 % 63,000 70 % 144,000 40 % Traceable fixed expenses 100,800 22.4 % 46,800 52 % 54,000 15 % Office segment margin 106,200 23.6 % $ 16,200 18 % $ 90,000 25 % Common fixed expenses not traceable to offices 72,000 16.0 % Net operating income $ 34,200 7.6 % Required:
1-a. Compute the companywide break-even point in dollar sales.
1-b. Compute the break-even point for the Chicago office and for the Minneapolis office.
1-c. Is the companywide break-even point greater than, less than, or equal to the sum of the Chicago and Minneapolis break-even points?

Answer 1

Answer:

Part 1-a: The breakeven of the complete company is $375652.17

Part 1-b: The breakeven for the Chicago Office is $66857.14 while that of the Minneapolis office is $135000.

Part 1-c: The value of breakeven for the company is more than that of the Chicago and Minneapolis office.

Explanation:

Part 1-a

For the whole company

$Contribution \,Ratio=\dfrac{Contribution\, Margin \times 100}{Sales}$

Here the Contribution Margin is $207,000

Sales is $450,000

So the contribution ratio is given as

$Contribution \,Ratio=\dfrac{207000 \times 100}{450000}\\Contribution \,Ratio=46\%$

Now Fixed cost of the company is given as sum of the traceable fixed expenses and non-traceable expenses which are given as

$Fixed \,Cost=Traceable\, Fixed\, Expenses+Non-traceable\, Fixed\, Expenses$

Here

Traceable fixed expenses are $100,800

Non traceable fixed expenses are 72,000

$Fixed \,Cost=Traceable\, Fixed\, Expenses+Non-traceable\, Fixed\, Expenses\\Fixed \,Cost=100800+72000\\Fixed \,Cost=172800$

Now the Breakeven is given as

$Breakeven=\dfrac{Fixed\,Cost}{Contribution\,Ratio}\\Breakeven=\dfrac{172800}{46\%}\\Breakeven=\dfrac{172800}{0.46}\\Breakeven=\ 375652.17$

So the breakeven of the complete company is $375652.17

Part 1-b

Chicago

For the Chicago office

$Contribution \,Ratio=\dfrac{Contribution\, Margin \times 100}{Sales}$

Here the Contribution Margin is $63,000

Sales is $90,000

So the contribution ratio is given as

$Contribution \,Ratio=\dfrac{63000 \times 100}{90000}\\Contribution \,Ratio=70\%$

Traceable fixed cost for Chicago are $46,800

Now the Breakeven is given as

$Breakeven=\dfrac{Fixed\,Cost}{Contribution\,Ratio}\\Breakeven=\dfrac{46800}{70\%}\\Breakeven=\dfrac{46800}{0.70}\\Breakeven=\ 66857.14$

So the breakeven of the Chicago office is $66857.14

Minneapolis

For the Minneapolis office

$Contribution \,Ratio=\dfrac{Contribution\, Margin \times 100}{Sales}$

Here the Contribution Margin is $144,000

Sales is $360,000

So the contribution ratio is given as

$Contribution \,Ratio=\dfrac{144000 \times 100}{360000}\\Contribution \,Ratio=40\%$

Traceable fixed cost for Chicago are $54,000

Now the Breakeven is given as

$Breakeven=\dfrac{Fixed\,Cost}{Contribution\,Ratio}\\Breakeven=\dfrac{54000}{40\%}\\Breakeven=\dfrac{54000}{0.40}\\Breakeven=\ 135000$

So the breakeven of the Minneapolis office is $135000

Part 1-c

The sum of the breakeven for the Chicago and Minneapolis office is $66857.14+$135000=$201857.14

The value of breakeven for the company is $375652.17

As the value of breakeven for the company is more than that of the Chicago and Minneapolis office.