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	$	630,000	100	%	$	420,000	100	%	$	210,000	100	%
Variable expenses		378,000	60	%		273,000	65	%		105,000	50	%
Contribution margin		252,000	40	%		147,000	35	%		105,000	50	%
Traceable fixed expenses		75,600	12	%		21,000	5	%		54,600	26	%
Market segment margin		176,400	28	%	$	126,000	30	%	$	50,400	24	%
Common fixed expenses not traceable to markets		18,900	3	%
Office segment margin	$	157,500	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 $8,400. Marketing studies indicate that such a campaign would increase sales in the Medical market by $73,500 or increase sales in the Dental market by $63,000.

Required:

1. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market??

	Company's profits by

2. How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Dental Market?

	Company's profits by

3. In which of the markets would you recommend that the company focus its advertising campaign?

In which of the markets would you recommend that the company focus its advertising campaign?

	Medicalradio button unchecked1 of 2 Dentalradio button unchecked2 of 2

Answer 1

Req1: Contribution of medical market: $147000
Sales revenue of medical market: $ 420,000
CM ratio: Contribution/ Sales revenue *100
	($ 147000 /420000) *100 =35%
Additional fixed cost: $ 8400
Additional sales revenue generated in Medical market: $ 73500
Additional contribution generated: 73500*35% = 25725
Net increase in profits:
Additional contribution earned				25725
Less: Addvertisement expense				8400
Net Increase in profits				17325
Req 2:
Contribution earned in Dental: $105000
Sales revenue: $ 210,000
CM ratio: $105000 /210000 *100 =50%
Additiional fixed cost: $8400
Additional sales revenue generated in Dental market: $ 63000
Additional contribution earned: 63000*50% = $ 31500
Increase in Profits:
Additional contribution earned:				31500
Less: Advertisement expense				8400
Net increase in profits				23100
Req 3:
DENTAL MARKET, the cmpany should focu on Dental market.