Ofice Total Company 100% Minneapolis Chicago 100% $300,000 Sales Varlable expenses. Contribution margin Traceable fixed expenses Office segment margin. Common fixed expenses not traceable to offices. Net operating income. $450,000 $150,000 100% 225,000 S0% 105,000 50% 30% 180,000 60% 70% 48,000 16% 126.000 28% 78,000 52% 18% 24% S 72,000 99,000 14% $ 27.000 63,000 S 36,000 8%
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Working with a Segmented Income Statement; Break-Even Analysis
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:
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, less than, or equal to the sum of the Chicago and Minneapolis break-even points? Why?
2. 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.
3. Refer to the original data. Assume that sales in Chicago increase by 550,000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs.
a. Prepare a new segmented income statement for the 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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