Raner, Harris & Chan is a consulting firm that specializes in information system
ID: 2520288 • 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 $10,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $87,500 or increase sales in the Dental market by $75,000.
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 $ 750,000 100 % $ 500,000 100 % $ 250,000 100 % Variable expenses 450,000 60 % 325,000 65 % 125,000 50 % Contribution margin 300,000 40 % 175,000 35 % 125,000 50 % Traceable fixed expenses 90,000 12 % 25,000 5 % 65,000 26 % Market segment margin 210,000 28 % $ 150,000 30 % $ 60,000 24 %Common fixed expenses
not traceable to markets
Explanation / Answer
Answer
Fixed cost of advertising is added to ‘’treaceable’’ fixed expenses.
Medical Market
Dental Market
Total Minneapolis
Sales
$ 5,87,500.00 [500000+87500]
$ 2,50,000.00
$ 8,37,500.00
Variable expenses
$ 3,81,875.00 [587500 x 65%]
$ 1,25,000.00
$ 5,06,875.00
Contribution margin
$ 2,05,625.00
$ 1,25,000.00
$ 3,30,625.00
Traceable fixed expenses
$ 35,000.00 [25000+10000]
$ 65,000.00
$ 1,00,000.00
Market segment margin
$ 1,70,625.00
$ 60,000.00
$ 2,30,625.00
Common fixed expenses
$ 22,500.00
not traceable to markets
$ -
Office segment margin
$
$ 2,08,125.00
Increase in Net Income of Minneapolis = 208125 – 187500 = $20,625
Medical Market
Dental Market
Total Minneapolis
Sales
$ 5,00,000.00
$ 3,25,000.00 [250000 + 75000]
$ 8,25,000.00
Variable expenses
$ 3,25,000.00
$ 1,62,500.00 [325000 x 50%]
$ 4,87,500.00
Contribution margin
$ 1,75,000.00
$ 1,62,500.00
$ 3,37,500.00
Traceable fixed expenses
$ 25,000.00
$ 75,000.00 [65000+10000]
$ 1,00,000.00
Market segment margin
$ 1,50,000.00
$ 87,500.00
$ 2,37,500.00
Common fixed expenses
$ 22,500.00
not traceable to markets
$ -
Office segment margin
$
$ 2,15,000.00
Increase in Net Income of Minneapolis = 215000 – 187200 = $27,500
Since the increase in Net Income is more ($27500) when advertising is carried for Dental Market, the same is recommended that company focus its advertising campaign on Dental Market.
Medical Market
Dental Market
Total Minneapolis
Sales
$ 5,87,500.00 [500000+87500]
$ 2,50,000.00
$ 8,37,500.00
Variable expenses
$ 3,81,875.00 [587500 x 65%]
$ 1,25,000.00
$ 5,06,875.00
Contribution margin
$ 2,05,625.00
$ 1,25,000.00
$ 3,30,625.00
Traceable fixed expenses
$ 35,000.00 [25000+10000]
$ 65,000.00
$ 1,00,000.00
Market segment margin
$ 1,70,625.00
$ 60,000.00
$ 2,30,625.00
Common fixed expenses
$ 22,500.00
not traceable to markets
$ -
Office segment margin
$
$ 2,08,125.00
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