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:
 

	Total Company		Office
			Chicago		Minneapolis
Sales	$ 462,000	100%	$ 156,000	100%	$ 306,000	100%
Variable expenses	231,000	50%	46,800	30%	183,600	60%
Contribution margin	231,000	50%	109,200	70%	122,400	40%
Traceable fixed expenses	129,360	28%	81,120	52%	48,960	16%
Office segment margin	101,640	22%	$ 28,080	18%	$ 73,440	24%
Common fixed expenses not traceable to offices	64,680	14%
Net operating income	$ 36,960	8%

 

Assume that Minneapolis’ sales by major market are:

 

	Minneapolis		Market
			Medical		Dental
Sales	$ 306,000	100%	$ 208,000	100%	$ 108,000	100%
Variable expenses	183,600	60%	133,120	64%	56,160	52%
Contribution margin	122,400	40%	74,880	36%	51,840	48%
Traceable fixed expenses	48,960	16%	12,480	6%	22,680	21%
Office segment margin	73,440	24%	$ 62,400	30%	$ 29,160	27%
Common fixed expenses not traceable to offices	15,000	5 %
Net operating income	$ 58,440	19 %

 

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 $7,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $44,000 or increase sales in the Dental market by $41,000.

 

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?

> Please show me how you came up with the answers with as much detailed information as possible 🙂🙂🙂. It's easier for me to understand with the work shown out. Thank you for the help!

Answer 1

· Requirements asked

Requirement 1
Company's profits	INCREASES	by	$                      8,840.00
Requirement 2
Company's profits	INCREASES	by	$                    12,680.00

--Working

Working		Medical	Dental
A	Contribution margin ratio	36%	48%
B	Increase in sale if advertising compaign carried out	$                            44,000.00	$               41,000.00
C = A x B	Increase in contribution margin	$                            15,840.00	$              19,680.00
D	Increase in Traceable fixed cost	$                              7,000.00	$                 7,000.00
E = C - D	Net Increase in Market Segment margin	$                              8,840.00	$              12,680.00

· Requirement 3

The company should FOCUS its advertising on DENTAL market, because increase in company’s profit is MORE.