Raner, Harris & Chan is a consulting firm that specializes in information system

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 $6,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $52,500 or increase sales in the Dental market by $45,000.

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?

Market

Minneapolis Medical Dental Sales $ 450,000 100 % $ 300,000 100 % $ 150,000 100 % Variable expenses 270,000 60 % 195,000 65 % 75,000 50 % Contribution margin 180,000 40 % 105,000 35 % 75,000 50 % Traceable fixed expenses 54,000 12 % 15,000 5 % 39,000 26 % Market segment margin 126,000 28 % $ 90,000 30 % $ 36,000 24 %

Common fixed expenses
not traceable to markets

13,500 3 % Office segment margin $ 112,500 25 %

Explanation / Answer

Part 1 Advertising campaigh implemented in Medical market

Advertisement cost is traceable fixed cost to Medical market

$229125

(65%)

$75000

(50%)

$123375

(35%)

$75000

(50%)

$21000

($15000+$6000)

(5.96%)

$39000 (26%)

$102375

(29.04%)

$36000

($24%)

$12375

($124875 - $112500)

Part 2 Advertising campaign implemented in Dental market

Company

(Minneapolis)

$292500

(59.09%)

$202500

(40.91%)

$45000

($39000 + $6000)

(23.08%)

$142500

$28.79%)

$16500

($129000 - $112500)

Part 3 Decision

Advertisement market should be implemented in dental market as this market will generate more revenue to minneapolis division of company

Particulars Medical Market Dental Market Total company (Minneapolis) Sales $352500 $150000 $502500 Less : Variable expenses

$229125

(65%)

$75000

(50%)

$304125 ($60.52) CONTRIBUTION

$123375

(35%)

$75000

(50%)

$198375 (39.48%) TRACEABLE FIXED COST

$21000

($15000+$6000)

(5.96%)

$39000 (26%)

$60000 (11.94%) Market segment margin

$102375

(29.04%)

$36000

($24%)

$138375 (27.54%) COMMON FIXED COST NOT TRACEABLE TO ANY MARKET $13500 (2.69%) NET INCOME $124875 (24.85%) INCREMENT IN COMPANY PROFITS

$12375

($124875 - $112500)

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