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:

							Office
	Total Company						Chicago						Minneapolis
Sales	$	450,000		100	%		$	150,000		100	%		$	300,000		100	%
Variable expenses		225,000		50	%			45,000		30	%			180,000		60	%
Contribution margin		225,000		50	%			105,000		70	%			120,000		40	%
Traceable fixed expenses		126,000		28	%			78,000		52	%			48,000		16	%
Office segment margin		99,000		22	%		$	27,000		18	%		$	72,000		24	%
Common fixed expenses not traceable to offices		63,000		14	%
Net operating income	$	36,000		8	%

Assume that Minneapolis’ sales by major market are:

							Market
	Minneapolis						Medical						Dental
Sales	$	300,000		100	%		$	200,000		100	%		$	100,000		100	%
Variable expenses		180,000		60	%			128,000		64	%			52,000		52	%
Contribution margin		120,000		40	%			72,000		36	%			48,000		48	%
Traceable fixed expenses		33,000		11	%			12,000		6	%			21,000		21	%
Market segment margin		87,000		29	%		$	60,000		30	%		$	27,000		27	%
Common fixed expenses not traceable to markets		15,000		5	%
Office segment margin	$	72,000		24	%

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 $5,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $40,000 or increase sales in the Dental market by $35,000.

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