Question

Exercise 7-17 Working with a Segmented Income Statement [LO7-4]

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:

					Market
	Minneapolis				Medical				Dental
Sales	$	450,000	100	%	$	300,000	100	%	$	150,000	100	%
Variable expenses		270,000	60	%		195,000	65	%		75,000	50	%
Contribution margin		180,000	40	%		105,000	35	%		75,000	50	%
Traceable fixed expenses		54,000	12	%		15,000	5	%		39,000	26	%
Market segment margin		126,000	28	%	$	90,000	30	%	$	36,000	24	%
Common fixed expenses not traceable to markets		13,500	3	%
Office segment margin	$	112,500	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 $6,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $52,500 or increase sales in the Dental market by $45,000.

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?

How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market

	Company's profits increase by

How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market

	Company's profits increase by

Answer 1

1
Increase in sales	52500
X Contribution margin ratio	35%
Increase in Contribution margin	18375
Less: Advertising costs	6000
Company's profits increase by	12375
2
Increase in sales	45000
X Contribution margin ratio	50%
Increase in Contribution margin	22500
Less: Advertising costs	6000
Company's profits increase by	16500
3
Dental market, as profits increase in higher