Exercise 6-17 Working with a Segmented Income Statement [Lo6-4] Raner, Harris &
ID: 2567191 • Letter: E
Question
Exercise 6-17 Working with a Segmented Income Statement [Lo6-4] Raner, Harris & Chan is a consulting firm that speclalizes 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 $360,000 100 $240,000 100 $120,000 1008 Sales Variable expenses Contribution margi Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets Office segment margin 216,000 609 156,000 65% 144,000 40 84,000 35% 12,000 60,000 50a 60,000 50 31,200 26 43,200 122 100,800 289 $ 72,000 308 $ 28,800 2 34 $90,000 25% The company would like to initlate 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 Requirec 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? profits Required 1 Required 2>Explanation / Answer
Solution:
1) Advertising campaign is implemented in Medical Market
Increase in Sales in Medical Market = $42,000
Contribution Margin Ratio in Medical Market = 35%
Increase in Contribution Margin = Increase in Sales $42,000 x 35% = $14,700
Advertising Campaign Cost = $4,800
Increase in Profit = 14,700 – 4800 = $9,900
Company’s profit increase by $9,900
2)
Increase in Sales in Dental Market due to Advertising Campaign = $36,000
Contribution Margin Ratio in Dental Market = 50%
Increase in Contribution Margin = 36,000*50% = $18,000
Advertising Cost = $4,800
Net Increase in Profit = 18,000 – 4,800 = $13,200
Company’s profit increase by $13,200
3) Increase in Profit of the company from advertising campaign in Dental Market is higher than Medical Market. Hence the company should focus its advertising campaign in Dental Market
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you