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:

Required:

1.         By how much would the company’s net operating income increase if Minneapolis increased its sales by $75,000 per year? Assume no change in cost behavior patterns.

2.         Refer to the original data. Assume that sales in Chicago increase by $50,000 next year and that sale in Minneapolis remain unchanged. Assume no change in fixed costs.

(a)        Prepare a new segmented income statement for the company using the above format. Show both amounts and percentages.

(b)        Observe from the income statement you have prepared that the contribution margin ratio for Chicago has remained unchanged at 70% (the same as in the above data) but that the segment margin ratio has changed. How do you explain the change in the segment margin ratio?

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Office Total Company Chicago Minneapolis Sales S450,000 100% $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 16% 126,000 28% _78,000 52% 48,000 22% $ 27,000 18% $ 72,000 Office segment margin 99,000 24% Common fixed expenses not traceable to office 63,000 14% $ 36,000 Net operating income