Question

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:

Assume that Minneapolis’ sales by major market are:

							Market
	Minneapolis						Medical						Dental
Sales	$	300,000		100	%		$	200,000		100	%		$	100,000		100	%
Variable expenses		180,000		60	%			128,000		64	%			52,000		52	%
Contribution margin		120,000		40	%			72,000		36	%			48,000		48	%
Traceable fixed expenses		33,000		11	%			12,000		6	%			21,000		21	%
Market segment margin		87,000		29	%		$	60,000		30	%		$	27,000		27	%
Common fixed expenses not traceable to markets		15,000		5	%
Office segment margin	$	72,000		24	%

The company would like to initiate an intensive advertising campaign in one of the two market segments during the next month. The campaign would cost $5,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $40,000 or increase sales in the Dental market by $35,000.

Required:

1. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market?

2. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market?

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

Answer 1

1
Increase in Sales	40000
X Contribution margin ratio	36%
Increase in Contribution margin	14400
Less: Advertising expense	5000
Company's profits increase by	9400
2
Increase in Sales	35000
X Contribution margin ratio	48%
Increase in Contribution margin	16800
Less: Advertising expense	5000
Company's profits increase by	11800
3
Dental Market, as profit increase in higher in Dental Market