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 below:
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 %

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

Explanation:

 1. The computation of the company wide break-even point in dollar sales is shown below:

Break even point = (Traceable fixed expenses + Common fixed expenses   ) ÷ (Profit volume Ratio)  

where,  

Contribution margin = Sales - Variable expenses

= $450,000 - $225,000

= $225,000

And, Profit volume ratio = (Contribution margin) ÷ (Sales) × 100

= ($225,000) ÷ ($450,000) × 100

= 50%

So, the company wide break even point in dollar sales is

= ($126,000 + $63,000) ÷ (50%)

= $378,000

b. For Chicago

Break even point = (Traceable fixed expenses) ÷ (Profit volume Ratio)  

where,  

Contribution margin = Sales - Variable expenses

= $150,000 - $45,000

= $105,000

And, Profit volume ratio = (Contribution margin) ÷ (Sales) × 100

= ($105,000) ÷ ($150,000) × 100

= 70%

So, the company wide break even point in dollar sales is

= ($78,000) ÷ (70%)

= $111,429

For Minneapolis

Break even point = (Traceable fixed expenses) ÷ (Profit volume Ratio)  

where,  

Contribution margin = Sales - Variable expenses

= $300,000 - $180,000

= $120,000

And, Profit volume ratio = (Contribution margin) ÷ (Sales) × 100

= ($120,000) ÷ ($300,000) × 100

= 40%

So, the company wide break even point in dollar sales is

= ($48,000) ÷ (40%)

= $120,000

c. The company wide break even point in sales dollars is $378,000 and the total is $111,429 + $120,000 = $231,429

So, the company wide break even point is greater than the  sum of the Chicago and Minneapolis break-even points due to the common fixed expenses