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. 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.
   1. Prepare a new segmented income statement for the Chicago office only showing both amounts and percentages (4 points)
   2. 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)
2. 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)