Raner, Harris & Chan is a consulting firm that specializes in information system
ID: 2562799 • 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 Minneapolis Medical Dental Sales Variable expenses Contribution margin Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets Office segment margin $360,000 100% 240,000 100% 120,000 100% 216,000 60% 156,000 65% 144,000 40% 43,200 12% 60,000 50% 60,000 50% 31,200 26% 84,000 35% 12,000 100,800 28% $72,000 30% $28,800 24% 10,800 3% $90,000 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 $4,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $42,000 or increase sales in the Dental market by $36,000 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? Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 How much would the company's profits increase (decrease) if it implemented the advertising campaign in the Medical Market? Company's profits increaseExplanation / Answer
Solution:
1) Calculation of profit increase or (decrease) if advertising campaign is implemented in the Medical Market
Incremental Contribution Margin due to increase in sale in Medial Market ($42,000*35%)
$14,700
Less: Cost of Advertising Campaign
($4,800)
Net Increase in Profit
$9,900
Company’s profit increase by $9,900
2) Calculation of profit increase or (decrease) if advertising campaign is implemented in the Dental Market
Incremental Contribution Margin due to increase in sale in Dental Market ($36,000*50% CM Ratio)
$18,000
Less: Cost of Advertising Campaign
($4,800)
Net Increase in Profit
$13,200
Company’s profit increase by $13,200
3) It is recommended to the company to focus its advertising campaign in DENTAL MARKET, since the Net Increase in Company’s Profit is higher.
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Incremental Contribution Margin due to increase in sale in Medial Market ($42,000*35%)
$14,700
Less: Cost of Advertising Campaign
($4,800)
Net Increase in Profit
$9,900
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