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 as follows:
|
|
|
Market |
|
Minneapolis |
Medical |
Dental |
| Sales |
$450,000 |
100% |
$300,000 |
100% |
$150,000 |
100% |
| Variable expenses |
270,000
|
60%
|
195,000
|
65%
|
75,000
|
50%
|
| Contribution margin |
180,000 |
40% |
105,000 |
35% |
75,000 |
50% |
| Traceable fixed expenses |
54,000
|
12%
|
15,000
|
5%
|
39,000
|
26%
|
| Market segment margin |
126,000 |
28% |
$90,000
|
30%
|
$36,000
|
24%
|
Common fixed expenses
not traceable to markets |
13,500 |
3% |
|
|
|
|
| Office segment margin |
$112,500
|
25%
|
|
|
|
|
The company would like to initiate an intensive advertising campaign in one of the two market segmentsduring the next month. The campaign would cost $6,000. Marketing studies indicate that such a campaign would increase sales in the Medical market by $52,500 or increase sales in the Dental market by $45,000.
Required:
Determine the increase in net operating income in each market if the advertising campaign were to be initiated in that market.