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: 1000 SOB Minneapolis Medical $510.000 1001 $340,000 1001 $170,000 306.000 601 221,000 658 85,000 204,000 400 119.000 358 85.000 61,200 121 17,000 58 44,200 142,800 286 $102,000 300 40.00 261 241 Variable expenses Contribution margin raceable fixed expenses Market segment margin C on fixed expenses not traceable to markets office segment margin 15,300 $127,500 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 $6,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $59,500 or increase salas in the Dental market by $51,000. 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market? Company's profits Required 2 >

Answer 1

Increase in profits = Increase in contribution margin – Additional cost

1.Medical Market = 59500*35% - 6,800

= $14,025

2.Dental Market = 51,000*50% - 6,800

= $18,700

3.Dental Market, since profits will increase by a higher amount