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	$	390,000	100	%	$	260,000	100	%	$	130,000	100	%
Variable expenses		234,000	60	%		169,000	65	%		65,000	50	%
Contribution margin		156,000	40	%		91,000	35	%		65,000	50	%
Traceable fixed expenses		46,800	12	%		13,000	5	%		33,800	26	%
Market segment margin		109,200	28	%	$	78,000	30	%	$	31,200	24	%
Common fixed expenses not traceable to markets		11,700	3	%
Office segment margin	$	97,500	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 $5,200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $45,500 or increase sales in the Dental market by $39,000.

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

1)	Contribution margin of Medical market			35%
	Incremental margin on increase sales			15,925
	Less: incremental marketing expenses			(5,200)
	Incremental profit			10,725
2)	Contribution margin of Dental market			50%
	Incremental margin on increase sales			19,500
	Less: incremental marketing expenses			(5,200)
	Incremental profit			14,300

3) Basis of above analysis, we would recommend to focus company advertisement on Dental market.