Raner, Harris & Chan is a consulting firm that specializes in information system
ID: 2404535 • Letter: R
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 Dental Sales Variable expenses Contribution margin Traceable fixed expenses Medical $780,000 1008 $520,000 1008 $260,000 100% 468,000 60% 338,000 65% 130,000 50% 312,000 40% 182,000 35% 130,000 50% 93,600 12% 26,000 5 9 67,600 26% Market segment margin 218,400 28% $156,000 308 $62,400 24% Common fixed expenses not traceable to markets 23,400 $195,000 39 Office segment margirn 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 $10,400. Marketing studies indicate that such a campaign would increase sales in the Medical market by $91,000 or increase sales in the Dental market by $78,000 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market? mpany's profits Required 1 Required 2>Explanation / Answer
Answers
Working
Medical
Dental
A
Contribution margin ratio
35%
50%
B
Increase in sale if advertising campaign carried out
$ 91,000.00
$ 78,000.00
C = A x B
Increase in contribution margin
$ 31,850.00
$ 39,000.00
D
Increase in Traceable fixed cost
$ 10,400.00
$ 10,400.00
E = C - D
Net Increase in Market Segment margin
$ 21,450.00
$ 28,600.00
Requirement 1
Company's profits
INCREASES
by
$ 21,450.00
Requirement 2
Company's profits
INCREASES
by
$ 28,600.00
The company should focus its advertising campaign on DENTAL MARKET because Company’s profits will increase more it this market. This is because, the contribution margin ratio of Dental Margin is very high when compared to Medical market.
Working
Medical
Dental
A
Contribution margin ratio
35%
50%
B
Increase in sale if advertising campaign carried out
$ 91,000.00
$ 78,000.00
C = A x B
Increase in contribution margin
$ 31,850.00
$ 39,000.00
D
Increase in Traceable fixed cost
$ 10,400.00
$ 10,400.00
E = C - D
Net Increase in Market Segment margin
$ 21,450.00
$ 28,600.00
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