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: points eBook Market Minneapolis Medical Dental $900.000 1001 $600,000 1001 $300,000 1000 540.000 604 390,000 651 150,000 SON 360,000 1409210,000 350 150.000 501 108,000 120 30,000 50 78,000 261 252.000 280 $180,000 301 $72.000 241 Sales Variable expenses Contribution margin Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets office segment margin Print ferences 22.000 $225,000 250 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 $12,000, Marketing studies indicate that such a campaign would increase sales in the Medical market by $105,000 or increase sales in the Dental market by $90,000 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. Ranirert Band

Answer 1

Contribution margin ratio for medical (210000/600000)	35%
Contribution margin ratio for dental (150000/300000)	50%
If the advertising campaign in the medical segment
Increase in sales of medical segments	$              105,000
Multiply: Contribution margin ratio for medical	35%
Increase in contribution margin	$                36,750
Increase in fixed cost (advertising cost)	$                12,000
Increases in profit	$                24,750
If the advertising campaign in the dental segment
Increase in sales of dental segments	$                90,000
Multiply: Contribution margin ratio for dental	50%
Increase in contribution margin	$                45,000
Increase in fixed cost (advertising cost)	$                12,000
Increases in profit	$                33,000
Recommendation for the advertising campaign
Increases in profit If the advertising campaign in the medical segment	$                24,750
Increases in profit If the advertising campaign in the dental segment	$                33,000
The dental segment has a higher increase in profit.	Dental segment
The company focus its advertising campaign in the dental segment	Dental segment