Question

Exercise 7-17 Working with a Segmented Income Statement (L07-4) 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: Sales Variable expenses Contribution margin Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets office segment margin Market Minneapolis Medical Dental $300,000 100# $200,000 1000 $100,000 1000 180.000 608 130.000 550 50.000 50 120.000 406 70.000 250 50.000 500 36,000 120 10,000 58 26,000 260 84,000 288 $ 60,000 308 $ 24,000 240 9,000 $75.000 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 $4,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $35,000 or increase sales in the Dental market by $30,000. 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 sales*contribution margin ratio- increase in fixed costs

1. If implemented in Medical market = 35000*35% - 4000=$8,250

2. Dental market = 30,000*50% -4000 =$11,000

Hence, should focus on Dental market as income will increase by a higher amount