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	$	570,000	100	%	$	380,000	100	%	$	190,000	100	%
Variable expenses		342,000	60	%		247,000	65	%		95,000	50	%
Contribution margin		228,000	40	%		133,000	35	%		95,000	50	%
Traceable fixed expenses		68,400	12	%		19,000	5	%		49,400	26	%
Market segment margin		159,600	28	%	$	114,000	30	%	$	45,600	24	%
Common fixed expenses not traceable to markets		17,100	3	%
Office segment margin	$	142,500	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 $7,600. Marketing studies indicate that such a campaign would increase sales in the Medical market by $66,500 or increase sales in the Dental market by $57,000.

How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market?

Company's profits

by

How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market?

Company's profits

by

Answer 1

Contribution margin ratio of Medical market = 35%

Increase in sales = $66,500

Increase in advertising cost = $7,600

Increase in company profit = Increase in sales x Contribution margin ratio of Medical market - 7,600

= 66,500 x 35% - 7,600

= 23,275-7,600

= $15,675

	Company's profits by $15,675

Contribution margin ratio of Dental Market = 50%

Increase in sales = $57,000

Increase in advertising cost = $7,600

Increase in company profit = Increase in sales x Contribution margin ratio of Dental market - 7,600

= 57,000 x 50% - 7,600

= 28,500-7,600

= $20,900

	Company's profits by $20,900

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