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 Variable expenses Contribution margin Traceable fixed expenses Market segment margirn Common fixed expenses not traceable to markets Office segment margin $330,000 100% 198,000 60% 143,000 65% 77,000 35% 5% 100% $220,000 $110,000 55,000 55,000 28,600 26 100% 50% 50% 132,000 40% 39,600 128 92,400 28% $66,000 30% $26,400 24% 11,000 9,900 $82,500 25% 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 $4,400. Marketing studies indicate that such a campaign would increase sales in the Medical market by $38,500 or increase sales in the Dental market by $33,000 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
	Medical
Increase in sales	38500
X Contribution margin ratio	35%
Increase in Contribution margin	13475
Less: Advertising costs	4400
Increase in company's profits	9075
2
	Dental
Increase in sales	33000
X Contribution margin ratio	50%
Increase in Contribution margin	16500
Less: Advertising costs	4400
Increase in company's profits	12100
3
The company should focus on Dental market