Ex1

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

Increase in Dallas sale $75,000

Contribution margin ratio 40.00%
Increase in Company's NOI $30,000

2. Refer to the original data. Assume that sales in Houston increased by $50,000
next year and that sales in Dallas 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.

Head Quarter Office

Total Company Houston Dallas
Sales $800,000 100.00% $200,000 100.00% $600,000 100.00%
Variable expenses 420,000 52.50% 60,000 30.00% 360,000 60.00%
Contribution margin $380,000 47.50% $140,000 70.00% $240,000 40.00%
Traceable fixed expenses 168,000 21.00% 78,000 39.00% 90,000 15.00%
Market segment margin $212,000 26.50% $62,000 31.00% $150,000 25.00%
Common fixed expenses
(not traceable to offices) 120,000 15.00% $35,000
Net operating income $92,000 11.50% $35,000
b. Observe from the income statement you have prepared that the CM ratio for
Houston 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?

The traceable fixed expenses are distributed over more accounts as sales increase
and that is why the segment margin ratio has increased from 18% to 31%.

The contribution margin ratio is the same at 70% because there is no

information to makes the selling price per unit or the variable cost per
unit are changed.
 Ex2

Required:
1. In which of the markets would you recommend that the company focus its
advertising campaign?

Construction Landscaping
Clients Clients
Increased sales from campaign $70,000 $60,000
CM ratio for market client 35.00% 50.00%
Increase in contribution margin $24,500 $30,000
Less cost of the campaign 8,000 8,000
Increased segment margin & NOI $16,500 $22,000

The company should focus its campaign on Landscaping Clients because it gives more NOI
than construction.

2. In Demo 6-4, Dallas shows $90,000 in traceable fixed expenses. What

happened to the $90,000 in this exercise?

The $90,000 of traceable fixed cost to Dallas has been accounted for as follows:

Construction Landscaping
Dallas Clients Clients
Traceable
fixed costs $72,000 $20,000 $52,000
Common fixed expenses
(not traceable
to markets) 18,000
Total $90,000