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. 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 $ 870,000 100 % $ 580,000 100 % $ 290,000 100 % Variable expenses 522,000 60 % 377,000 65 % 145,000 50 % Contribution margin 348,000 40 % 203,000 35 % 145,000 50 % Traceable fixed expenses 104,400 12 % 29,000 5 % 75,400 26 % Market segment margin 243,600 28 % $ 174,000 30 % $ 69,600 24 % Common fixed expenses not traceable to markets 26,100 3 % Office segment margin $ 217,500 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 $11,600. Marketing studies indicate that such 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) 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?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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. 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 | $ | 870,000 | 100 | % | $ | 580,000 | 100 | % | $ | 290,000 | 100 | % |
| Variable expenses | 522,000 | 60 | % | 377,000 | 65 | % | 145,000 | 50 | % | |||
| Contribution margin | 348,000 | 40 | % | 203,000 | 35 | % | 145,000 | 50 | % | |||
| Traceable fixed expenses | 104,400 | 12 | % | 29,000 | 5 | % | 75,400 | 26 | % | |||
| Market segment margin | 243,600 | 28 | % | $ | 174,000 | 30 | % | $ | 69,600 | 24 | % | |
|
Common fixed expenses |
26,100 | 3 | % | |||||||||
| Office segment margin | $ | 217,500 | 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 $11,600. Marketing studies indicate that such 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) 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?
Variable cost vary with the level of output where as fixed cost remain fixed.
Total cost will include both variable and fixed cost.
We need to introduce the advertising campaign in that market where we get higher contribution as fixed cost is not relevant.
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