Question

Assume that Minneapolis’ sales by major market are: Market Minneapolis Medical Dental Sales $ 390,000 100 % $ 260,000 100 % $ 130,000 100 % Variable expenses 234,000 60 % 169,000 65 % 65,000 50 % Contribution margin 156,000 40 % 91,000 35 % 65,000 50 % Traceable fixed expenses 46,800 12 % 13,000 5 % 33,800 26 % Market segment margin 109,200 28 % $ 78,000 30 % $ 31,200 24 % Common fixed expenses not traceable to markets 11,700 3 % Office segment margin $ 97,500 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 $5,200. Marketing studies indicate that such a campaign would increase sales in the Medical market by $45,500 or increase sales in the Dental market by $39,000. 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?

Answer 1

Answer:

1. Medical market $10,725

2. Dental market $14,300

3. Dental market

Explanation:

1. Calculation for How much would the company's profits increase (decrease) in the Medical Market

MEDICAL MARKET

Increase in sales $45,500

Contribution Magin ratio 35%

Increase in contribution margin $15,925

(Medical $45,500*35%=$15,925)

Less increase in Advertisement $5,200

Increase in company profit

$10,725

Based on the above calculation Medical Market profit will increase by $10,725

2. Calculation for How much would the company's profits increase (decrease) in the Dental Market

DENTAL MARKET

Increase in sales $39,000

Contribution Magin ratio 50%

Increase in contribution margin $19,500

(Dental $39,000*50%=$19,500)

Less increase in Advertisement $5,200

Increase in company profit

$14,300

Based on the above calculation Dental Market profit will increase by $14,300

3. Based on the above calculation I would recommend that the company should focus its advertising campaign on DENTAL MARKET because DENTAL MARKET has the highest profit of the amount of $14,300 than Medical market which has a profit of $10,725.