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 %
a. Compute the companywide break-even point in dollar sales.
b. Compute the break-even point for the Chicago office and for the Minneapolis office.
c. Is the companywide break-even point greater than, less than, or equal to the sum of the Chicago and Minneapolis break-even points?

Explanation:

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

As we know that

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, Contribution margin ratio = (Contribution margin) ÷ (Sales) × 100

= ($225,000) ÷ ($450,000) × 100

= 50%

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

= ($126,000 + $63,000) ÷ (50%)

= $378,000

b.  The break-even point for the Chicago office and for the Minneapolis office is as follows

For Chicago

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

where,  

Contribution margin = Sales - Variable expense

= $150,000 - $45,000

= $105,000

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

= ($105,000) ÷ ($150,000) × 100

= 70%

Therefore, the break even point in dollar sales is

= ($78,000) ÷ (70%)

= $111,429

And,

For Minneapolis

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

where,  

Contribution margin = Sales - Variable expenses

= $300,000 - $180,000

= $120,000

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

= ($120,000) ÷ ($300,000) × 100

= 40%

Therefore, the break even point in dollar sales is

= ($48,000) ÷ (40%)

= $120,000

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

Hence, the company wide break even point is more than the sum of the Chicago and Minneapolis break-even points because of the common fixed expenses

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