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 $ 570,000 100 % $ 380,000 100 % $ 190,000 100 % Variable expenses 342,000 60 % 247,000 65 % 95,000 50 % Contribution margin 228,000 40 % 133,000 35 % 95,000 50 % Traceable fixed expenses 68,400 12 % 19,000 5 % 49,400 26 % Market segment margin 159,600 28 % $ 114,000 30 % $ 45,600 24 % Common fixed expenses not traceable to markets 17,100 3 % Office segment margin $ 142,500 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 $7,600. Marketing studies indicate that such a campaign would increase sales in the Medical market by $66,500 or increase sales in the Dental market by $57,000. 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?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

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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	$	570,000	100	%	$	380,000	100	%	$	190,000	100	%
Variable expenses		342,000	60	%		247,000	65	%		95,000	50	%
Contribution margin		228,000	40	%		133,000	35	%		95,000	50	%
Traceable fixed expenses		68,400	12	%		19,000	5	%		49,400	26	%
Market segment margin		159,600	28	%	$	114,000	30	%	$	45,600	24	%
Common fixed expenses not traceable to markets		17,100	3	%
Office segment margin	$	142,500	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 $7,600. Marketing studies indicate that such a campaign would increase sales in the Medical market by $66,500 or increase sales in the Dental market by $57,000.

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?

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