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	$	360,000	100	%	$	240,000	100	%	$	120,000	100	%
Variable expenses		216,000	60	%		156,000	65	%		60,000	50	%
Contribution margin		144,000	40	%		84,000	35	%		60,000	50	%
Traceable fixed expenses		43,200	12	%		12,000	5	%		31,200	26	%
Market segment margin		100,800	28	%	$	72,000	30	%	$	28,800	24	%
Common fixed expenses not traceable to markets		10,800	3	%
Office segment margin	$	90,000	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 $4,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $42,000 or increase sales in the Dental market by $36,000.

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

Req 1.
Increase in sales of Medical market	42000
Multiply: CM ratio of Medical market	35%
Incraese in contribution margin		14700
Less: Additional advertisement cost	4800
Increase in Net Income		9900
Req 2.
Increase in sales in Dental market	36000
Multiply: CM ratio of Medical market	50%
Incraese in contribution margin		18000
Less: Additional advertisement cost	4800
Increase in Net Income		13200
Req 3.
DENTAL MARKET is recommended