Exercise 6-17 Working with a Segmented Income Statement[LO6-4]
Raner, Harris & Chan is a consulting firm that specializesin information systems for medical and dental clinics. The firm hastwo offices—one in Chicago and one in Minneapolis. The firmclassifies the direct costs of consulting jobs as variable costs. Acontribution format segmented income statement for the company’smost recent year is given:
Assume that Minneapolis’ sales by major market are:
| | | | | Market |
| Minneapolis | Medical | Dental |
| Sales | $ | 870,000 | 100 | % | $ | 580,000 | 100 | % | $ | 290,000 | 100 | % |
| Variableexpenses | | 522,000 | 60 | % | | 377,000 | 65 | % | | 145,000 | 50 | % |
| Contributionmargin | | 348,000 | 40 | % | | 203,000 | 35 | % | | 145,000 | 50 | % |
| Traceable fixedexpenses | | 104,400 | 12 | % | | 29,000 | 5 | % | | 75,400 | 26 | % |
| Market segmentmargin | | 243,600 | 28 | % | $ | 174,000 | 30 | % | $ | 69,600 | 24 | % |
Common fixed expenses
not traceable to markets | | 26,100 | 3 | % | | | | | | | | |
| Office segmentmargin | $ | 217,500 | 25 | % | | | | | | | | |
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The company would like to initiate an intensive advertisingcampaign in one of the two market segments during the next month.The campaign would cost $11,600. Marketing studies indicate thatsuch a campaign would increase sales in the Medical market by$101,500 or increase sales in the Dental market by $87,000.
Required:
1. How much would the company's profits increase (decrease) ifit implemented the advertising campaign in the Medical Market?
2. How much would the company's profits increase (decrease) ifit implemented the advertising campaign in the Dental Market?
3. In which of the markets would you recommend that the companyfocus its advertising campaign?
