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	$	870,000	100	%	$	580,000	100	%	$	290,000	100	%
Variable expenses		522,000	60	%		377,000	65	%		145,000	50	%
Contribution margin		348,000	40	%		203,000	35	%		145,000	50	%
Traceable fixed expenses		104,400	12	%		29,000	5	%		75,400	26	%
Market segment margin		243,600	28	%	$	174,000	30	%	$	69,600	24	%
Common fixed expenses not traceable to markets		26,100	3	%
Office segment margin	$	217,500	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 $11,600. Marketing studies indicate that such a campaign would increase sales in the Medical market by $101,500 or increase sales in the Dental market by $87,000.

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

Required 1 :
	Medical market
Increase in sales	$     101,500
(*) Contribution margin ratio	35%
Increase in contribution margin	$        35,525
(-) Cost of advertising campaign	$        11,600
Increase (decrease) in profits	$        23,925
Company's profits will increase by $23,925

Required 2 :
	Dental market
Increase in sales	$        87,000
(*) Contribution margin ratio	50%
Increase in contribution margin	$        43,500
(-) Cost of advertising campaign	$        11,600
Increase (decrease) in profits	$        31,900
Company's profits will increase by $31,900

Required 3 :

Answer : Dental market

Reason : The company should focus its advertising campaign in Dental market, because it will result in more increase in profit for the company than the Medical market.