Question

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:

Sales	$	1,594,000
Variable expenses		558,780
Contribution margin		1,035,220
Fixed expenses		1,139,000
Net operating income (loss)	$	(103,780)

In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

	Division
	East			Central			West
Sales	$	434,000		$	650,000		$	510,000
Variable expenses as a percentage of sales		52	%		23	%		36	%
Traceable fixed expenses	$	257,000		$	330,000		$	200,000

Required:

1. Prepare a contribution format income statement segmented by divisions.

2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $24,000 based on the belief that it would increase that division's sales by 11%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?

2-b. Would you recommend the increased advertising?

Answer 1

Answer to Requirement 1. Sales Variable Expenses Contribution Margin Traceable Fixed Expenses Divisional Segment Margin Common Fixed Expenses not traceable to Divisions Net Operating Loss Total Company 1,594,000 558,780 1,035,220 787,000 248,220 352,000 -103,780 East 434,000 225,680 208,320 257,000 -48,680 Division Central 650,000 149,500 500,500 330,000 170,500 West 510,000 183,600 326,400 200,000 126,400 Calculation: Common Fixed Expenses not traceable to Divisions = $1,139,000 - $787,000 = $352,000 Answer to Requirement 2. Incremental Sales ($510,000 * 11%) Contribution Margin Ratio (100% - 36% = 64%) Incremetal Revenue Less: Incremetal Advertising Expense Incremental Net Operating Income West Division 56,100 64% 35,904 24,000 11,904

Answer to Requirement 3.

Yes, Increase Advertising should be implemented as it will increase Nte Operating Income by $11,904.