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. 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 $ 660,000 100 % $ 440,000 100 % $ 220,000 100 % Variable expenses 396,000 60 % 286,000 65 % 110,000 50 % Contribution margin 264,000 40 % 154,000 35 % 110,000 50 % Traceable fixed expenses 79,200 12 % 22,000 5 % 57,200 26 % Market segment margin 184,800 28 % $ 132,000 30 % $ 52,800 24 % Common fixed expenses not traceable to markets 19,800 3 % Office segment margin $ 165,000 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 $8,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $77,000 or increase sales in the Dental market by $66,000.

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

Effect on Income when advertisement made in Medical market
Increase in sales of medical market due to advertisement	77,000
Multiply: Contribution margin ratio of medical market		35%
Increase in contribution				26950
Less: Additional advertisement expense			8800
Increase in income					18150
Effect on income when advertisement made in Dental market
Increase in sales of dental market due to advertisement	66000
Multiply: Contribution margin ratio of Dental market		50%
Increase in contribution				33,000
Less: Additional advertisemnt expense			8800
Incraese in income					24,200
Dental Market is recommended