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	$	750,000	100	%	$	500,000	100	%	$	250,000	100	%
Variable expenses		450,000	60	%		325,000	65	%		125,000	50	%
Contribution margin		300,000	40	%		175,000	35	%		125,000	50	%
Traceable fixed expenses		90,000	12	%		25,000	5	%		65,000	26	%
Market segment margin		210,000	28	%	$	150,000	30	%	$	60,000	24	%
Common fixed expenses not traceable to markets		22,500	3	%
Office segment margin	$	187,500	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 $10,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $87,500 or increase sales in the Dental market by $75,000.

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

• All working forms part of the answer
• Additional sales are added to Sales, and Variable cost has been increased as per given percentage.

Fixed cost of advertising is added to ‘’treaceable’’ fixed expenses.

• Requirement 1: Medical Market

	Medical Market	Dental Market	Total Minneapolis
Sales	$    5,87,500.00   [500000+87500]	$        2,50,000.00	$       8,37,500.00
Variable expenses	$    3,81,875.00 [587500 x 65%]	$        1,25,000.00	$       5,06,875.00
Contribution margin	$    2,05,625.00	$        1,25,000.00	$       3,30,625.00
Traceable fixed expenses	$       35,000.00 [25000+10000]	$           65,000.00	$       1,00,000.00
Market segment margin	$    1,70,625.00	$           60,000.00	$       2,30,625.00
Common fixed expenses			$           22,500.00
not traceable to markets			$                          -
Office segment margin	$		$       2,08,125.00

Increase in Net Income of Minneapolis = 208125 – 187500 = $20,625

• Requirement 2

	Medical Market	Dental Market	Total Minneapolis
Sales	$    5,00,000.00	$        3,25,000.00 [250000 + 75000]	$       8,25,000.00
Variable expenses	$    3,25,000.00	$        1,62,500.00 [325000 x 50%]	$       4,87,500.00
Contribution margin	$    1,75,000.00	$        1,62,500.00	$       3,37,500.00
Traceable fixed expenses	$       25,000.00	$           75,000.00 [65000+10000]	$       1,00,000.00
Market segment margin	$    1,50,000.00	$           87,500.00	$       2,37,500.00
Common fixed expenses			$           22,500.00
not traceable to markets			$                          -
Office segment margin	$		$       2,15,000.00

Increase in Net Income of Minneapolis = 215000 – 187200 = $27,500

• Requirement 3

Since the increase in Net Income is more ($27500) when advertising is carried for Dental Market, the same is recommended that company focus its advertising campaign on Dental Market.