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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SB Exercise 6-16 through Exercise 6-17 (Algo)
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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:
| Office | |||||||||||||||||
| Total Company | Chicago | Minneapolis | |||||||||||||||
| Sales | $ | 504,000 | 100 | % | $ | 177,000 | 100 | % | $ | 327,000 | 1 | % | |||||
| Variable expenses | 261,000 | 50 | % | 63,000 | 30 | % | 196,200 | 60 | % | ||||||||
| Contribution margin | 243,000 | 50 | % | 114,000 | 70 | % | 130,800 | 40 | % | ||||||||
| Traceable fixed expenses | 133,200 | 28 | % | 81,600 | 52 | % | 52,320 | 16 | % | ||||||||
| Office segment margin | 109,800 | 22 | % | $ | 32,400 | 18 | % | $ | 78,480 | 24 | % | ||||||
| Common fixed expenses not traceable to offices | 72,000 | 14 | % | ||||||||||||||
| Net operating income | $ | 37,800 | 8 | % | |||||||||||||
rev: 06_09_2020_QC_CS-215744
Exercise 6-17 (Algo) Working with a Segmented Income Statement [LO6-4]
Assume that Minneapolis’ sales by major market are:
| Market | |||||||||||||||||
| Minneapolis | Medical | Dental | |||||||||||||||
| Sales | $ | 327,000 | 100 | % | $ | 236,000 | 100 | % | $ | 136,000 | 100 | % | |||||
| Variable expenses | 196,200 | 60 | % | 137,000 | 64 | % | 61,000 | 52 | % | ||||||||
| Contribution margin | 130,800 | 40 | % | 99,000 | 36 | % | 75,000 | 48 | % | ||||||||
| Traceable fixed expenses | 52,320 | 16 | % | 15,600 | 6 | % | 30,000 | 21 | % | ||||||||
| Market segment margin | 78,480 | 24 | % | $ | 83,400 | 30 | % | $ | 45,000 | 27 | % | ||||||
|
Common fixed expenses not traceable to markets |
15,000 | 5 | % | ||||||||||||||
| Office segment margin | $ | 63,480 | 19 | % | |||||||||||||
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 $14,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $58,000 or increase sales in the Dental market by $62,000.
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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