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
Sales	$	390,000	100	%	$	260,000	100	%	$	130,000	100	%
Variable expenses		234,000	60	%		169,000	65	%		65,000	50	%
Contribution margin		156,000	40	%		91,000	35	%		65,000	50	%
Traceable fixed expenses		46,800	12	%		13,000	5	%		33,800	26	%
Market segment margin		109,200	28	%	$	78,000	30	%	$	31,200	24	%
Common fixed expenses not traceable to markets		11,700	3	%
Office segment margin	$	97,500	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 $5,200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $45,500 or increase sales in the Dental market by $39,000.

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?

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 by

Answer 1

Answer:

1. Company's profit if advertising campaign is implemented in Medical Market

In Medical Market:

Sales will increase by $45,500 so the variable cost will increase by $29,575 ($45,500 * 65%)

So, the traceable fixed expenses will increase by $5,200.

	Minneapolis		Medical		Dental
Sales	$435,500	100%	$305,500	100%	$130,000	100%
Variable expenses	$263,575	61%	$198,575	65%	$65,000	50%
Contribution margin	$171,925	39%	$106,925	35%	$65,000	50%
Traceable fixed expenses	$52,000	12%	$18,200	6%	$33,800	26%
Market segment margin	$119,925	28%	$88,725	29%	$31,200	24%
Common fixed expenses not traceable to markets	$11,700	3%
Office segment margin	$108,225	25%

So, the Company's profits Increase by $10,725, if campaign is implemented in Medical market.

2. Company's profit if advertising campaign is implemented in Dental Market

In Dental Market:

Sales will increase by $39,000 so the variable cost will increase by $19,500 ($39,000 * 50%)

So, the traceable fixed expenses will increase by $5,200.

	Minneapolis		Medical		Dental
Sales	$429,000	100%	$260,000	100%	$169,000	100%
Variable expenses	$253,500	59%	$169,000	65%	$84,500	50%
Contribution margin	$175,500	41%	$91,000	35%	$84,500	50%
Traceable fixed expenses	$52,000	12%	$13,000	5%	$39,000	23%
Market segment margin	$123,500	29%	$78,000	30%	$45,500	27%
Common fixed expenses not traceable to markets	$11,700	3%
Office segment margin	$111,800	26%

So, the Company's profits Increase by $14,300, if campaign is implemented in Dental market.

3. The company should focus its advertising campaign in Dental Market.