Problem 1 Segmented Income Statements (20 points)

Heather, Andrea and Meg 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 companys most recent year is given below:

Item 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 Costs $63,000 14%

Net Operating Income $36,000 8%

Required:

1) Compute the companywide break-even point in dollar sales. Also, compute the break-even point for the Chicago office and for the Minneapolis office. Is the companywide break-even point greater than, or equal to the sum of the Chicago and Minneapolis break-even points? Why? (6 points)

2) By how much would the companys net operating income increase if Minneapolis spent an extra $10,000 dollars on advertising on its office which resulted in $75,000 additional revenue for the Minneapolis office per year. Assume no change in cost behavior patterns (4 points)

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

a. Prepare a new segmented income statement for the Chicago office only showing both amounts and percentages (4 points)

b. Observe from the new segmented income statement for the Chicago office that the contribution margin remains unchanged at 70% but that the segment margin ratio has changed, how do you explain the change in the segment margin ratio? (2 points)

4) Imagine that next year is supposed to be a disastrous year for the Minneapolis office and sales are expected to drop by 50%, would you consider dropping the Minneapolis office? Why/Why not? (4 points)