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 Medical 100% 65% Minneapolis $540,000 324,000 Dental $180,000 90,000 98,০০৪ 46,800 Sales Variable expenses Contribution margin Traceable fixed expenses 100% $360,000 60% 40% 12% 100% 50% 234,000 126,000 18,000 35 % 5% 50% 26% 216,000 64,800 30 % $43,200 Market segment margin $108,000 24% 28% 151,200 Common fixed expenses 16,200 3% not traceable to markets Office segment margin $135,000 25% The company would like to initiate an intensive advertising campaign in one campaign would cost $7.200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $63,000 or increase sales in the Dental market by $54,000. the two market segments during the next month. The 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

Answer

• Workings

Working		Medical	Dental
A	Contribution margin ratio	35%	50%
B	Increase in sale if advertising compaign carried out	$                             63,000.00	$               54,000.00
C = A x B	Increase in contribution margin	$                             22,050.00	$               27,000.00
D	Increase in Traceable fixed cost	$                               7,200.00	$                 7,200.00
E = C - D	Net Increase in Market Segment margin	$                             14,850.00	$               19,800.00

• Requirement 1 and 2

Requirement 1
Company's profits	INCREASES	by	$                     14,850.00
Requirement 2
Company's profits	INCREASES	by	$                     19,800.00

• Requirement 3

Company should focus on DENTAL.