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
|
100%
|
$220,000
|
100%
|
|
Variable expenses
|
396,000
|
60%
|
286,000
|
65%
|
110,000
|
50%
|
|
Contribution margin
|
264,000
|
40%
|
154,000
|
35%
|
110,000
|
50%
|
|
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?