Question

Exercise 6-17 Working with a Segmented Income Statement [LO6-4]

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.

  

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-a.	Calculate the increased segment margin.

       

1-b.	In which of the markets would you recommend that the company focus its advertising campaign?
	Medical Dental

Answer 1

1a)

Income statement of Medical Market

Sales	352,500
Variable expenses	- 229,125
Contribution margin	123,375
Traceable fixed expenses	- 21,000
Market segment margin	102,375

Income statement of Dental Market

Sales	195,000
Variable expenses	- 97,500
Contribution margin	97,500
Traceable fixed expenses	- 45,000
Market segment margin	52,500

1b)

Increase in segment margin of Medical market = 102,375 - 90,000

= $12,375

Increase in segment margin of Dental market = 52,500 - 36,000

= $16,500

Since increase in segment margin of Dental market is more than Increase in segment margin of Medical market, hence the company should focus its advertising campaign in the Dental market.

Kindly comment if you need further assistance. Thanks