Question

Problem 1:

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	$	840,000	100	%	$	560,000	100	%	$	280,000	100	%
Variable expenses		504,000	60	%		364,000	65	%		140,000	50	%
Contribution margin		336,000	40	%		196,000	35	%		140,000	50	%
Traceable fixed expenses		100,800	12	%		28,000	5	%		72,800	26	%
Market segment margin		235,200	28	%	$	168,000	30	%	$	67,200	24	%
Common fixed expenses not traceable to markets		25,200	3	%
Office segment margin	$	210,000	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 $11,200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $98,000 or increase sales in the Dental market by $84,000.

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?

Answer 1

1.)	Company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market
	Increase in Sales	98,000
	Contribution margin	34,300	(98,000 x 35%)
	Less: Campaign cost	11,200
	Increase in company profit	$ 23,100
	*Due to increase in sales of Minneapolis, Traceable fixed expense and common fixed expense will not increase.
2.)	Company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market
	Increase in Sales	84,000
	Contribution margin	42,000	(84,000 x 50%)
	Less: Campaign cost	11,200
	Increase in company profit	$ 30,800
	*Due to increase in sales of Minneapolis, Traceable fixed expense and common fixed expense will not increase.