Exercise 6-17 Working with a Segmented Income Statement [Lo6-4] Raner, Harris &
ID: 2567725 • 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 Sales Variable expenses Contribution marg Traceable fixed expenses Market segment margin Common fixed expenses not traceable to markets Office segment margin $570,000 1008 $380,000 100 $190,000 1008 95,000 50a 342,000 609 247,000 65% 228,000 40% 133,000 35% 95,000 50 49,400 26 159,600 289 $114,000 309 $45,600 24 68,400 123 19,000 $142,500 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 $7,600. Marketing studies indicate that such a campaign would increase sales in the Medical market by $66,500 or Increase sales in the Dental market by $57,000. Required: 1. How much would the company's profits increase (decrease) f 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?Explanation / Answer
Original Case Consolidated Medical Segment Dental Segment Consolidated % Medical Segment Dental Segment Sales 570000 380000 190000 100.0% 100.0% 100.0% VC 342000 247000 95000 60.0% 65.0% 50.0% Contribution margin 228000 133000 95000 40.0% 35.0% 50.0% Traceable Fixed expenses 68400 19000 49400 12.0% 5.0% 26.0% Market segment margin 159600 114000 45600 28.0% 30.0% 24.0% Common fixed expenses not traceable 17100 3.0% Office margin 142500 Overall Margin% 25.0% Revised case 1: Marketing for Medical Segment Consolidated Medical Segment Dental Segment Consolidated Medical Segment Dental Segment Remarks Sales 636500 446500 190000 100.0% 100.0% 100.0% VC 385225 290225 95000 60.5% 65.0% 50.0% Copy paste the VC % from table above for Medical segment and compute VC as 446500*65% Contribution margin 251275 156275 95000 39.5% 35.0% 50.0% Traceable Fixed expenses 76000 26600 49400 11.9% 6.0% 26.0% Added Marketing expense of 7600 in fixed cost in Medical Segment Market segment margin 175275 129675 45600 27.5% 29.0% 24.0% Common fixed expenses not traceable 17100 2.7% Office margin 158175 Overall Margin% 24.9% Revised case 2: Marketing for Dental Segment Consolidated Medical Segment Dental Segment Consolidated Medical Segment Dental Segment Remarks Sales 693500 446500 247000 109.0% 100.0% 130.0% VC 370500 247000 123500 58.2% 55.3% 50.0% Copy paste the VC % from table above for Medical segment and compute VC as 247000*50% Contribution margin 323000 199500 123500 50.7% 44.7% 65.0% Traceable Fixed expenses 76000 19000 57000 11.9% 4.3% 30.0% Market segment margin 247000 180500 66500 38.8% 40.4% 35.0% Added Marketing expense of 7600 in fixed cost of Dental Segment Common fixed expenses not traceable 17100 2.7% Office margin 229900 Overall Margin% 36% Conclusion: Clearly in Case of Revised case 2, overall margin of company have increased, from 25% to 36%, so we the company should go ahead with infusing funds for marketing of dental segment