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	$	330,000	100	%	$	220,000	100	%	$	110,000	100	%
Variable expenses		198,000	60	%		143,000	65	%		55,000	50	%
Contribution margin		132,000	40	%		77,000	35	%		55,000	50	%
Traceable fixed expenses		39,600	12	%		11,000	5	%		28,600	26	%
Market segment margin		92,400	28	%	$	66,000	30	%	$	26,400	24	%
Common fixed expenses not traceable to markets		9,900	3	%
Office segment margin	$	82,500	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 $4,400. Marketing studies indicate that such a campaign would increase sales in the Medical market by $38,500 or increase sales in the Dental market by $33,000.

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

If the advertising campaign is implemented, then with the advertising campaign cost the company will incur only variable cost for the increased sales.

1. Results from implemenation of advertising campaign in Medical market :

Sales increase	$38,500
(-) variable cost for the increased sales [ 65 % * $38,500 ]	( $ 25,025 )
(-) Advertising campaign cost	( $4,400 )
Profit from the increased sales	$9,075

If the advertising campaign is implemented in medical market, the profits of the company will increase by $9,075

2. Results from implemenation of advertising campaign in Dental market :

Sales increase	$33,000
(-) variable cost for the increased sales [ 50% * $33,000 ]	( $16,500 )
(-) Advertising campaign cost	( $4,400 )
Profit from the increased sales	$12,100

If the advertising campaign is implemented in dental market, the profits of the company will increase by $12,100

3. Ans : I would recommend the company to focus its advertising campagin in the dental market as it is resulting in more increase in company's profit than the medical market.