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	$	690,000	100	%	$	460,000	100	%	$	230,000	100	%
Variable expenses		414,000	60	%		299,000	65	%		115,000	50	%
Contribution margin		276,000	40	%		161,000	35	%		115,000	50	%
Traceable fixed expenses		82,800	12	%		23,000	5	%		59,800	26	%
Market segment margin		193,200	28	%	$	138,000	30	%	$	55,200	24	%
Common fixed expenses not traceable to markets		20,700	3	%
Office segment margin	$	172,500	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 $9,200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $80,500 or increase sales in the Dental market by $69,000.

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

1
Increase in sales	80500
X Contribution margin ratio	35%
Increase in Contribution margin	28175
Less; Advertising costs	9200
Profits increase by	18975
2
Increase in sales	69000
X Contribution margin ratio	50%
Increase in Contribution margin	34500
Less; Advertising costs	9200
Profits increase by	25300
3
Dental market is recommend