Raner, Harris & Chan is a consulting firm that specializes in information system
ID: 2538008 • 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
Common fixed expenses
not traceable to markets
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??
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?
In which of the markets would you recommend that the company focus its advertising campaign?
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
Explanation / Answer
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.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.