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 Minneapolis Medical Dental $510,000 100% $340,000 100% $170,000 100% 306,000 5ex 221,000 65% 85, eee sex 204,000 40% 119,000 85,000 ses 61,200 12% 17,000 5% 44,200 26% 142,800 28% $102,000 30% $ 40,800 Sales Variable expenses Contribution margin Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets office segment margin es 15,300 $127,500 3 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 $6,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $59,500 or increase sales 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?

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