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Question - Working with a Segmented Income Statement
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.
Assume that Minneapolis' sales by major market are:
Minneapolis
Market
Medical
Dental
Sales
$660,000
100%
$440,000
$220,000
Variable expenses
396,000
60%
286,000
65%
110,000
50%
Contribution margin
264,000
40%
154,000
35%
Traceable fixed expenses
79,200
12%
22,000
5%
57,200
26%
Market segment margin
184,800
28%
$132,000
30%
$52,800
24%
Common fixed expenses not traceable to markets
19,800
3%
Office segment margin
$165,000
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 $8,800. Marketing studies indicate that such a campaign would increase sales in the Medical market by $77,000 or increase sales in the Dental market by $66,000.
Required:
a. Calculate the increased segment margin.
b. In which of the markets would you recommend that the company focus its advertising campaign?
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