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, 000,000

 Variable expenses

 390,000

 Contribution margin

 610,000

 Fixed expenses

 625, 000

 Net operating income  (loss)

$ (15,000)

 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:

 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 $15,000 based on the belief that it would increase that division's sales by 20%. 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

• Requirement 1

	Total	East	Central	West
Sales	$1,000,000	$250,000	$400,000	$350,000
Variable expenses	$390,000	$130,000	$120,000	$140,000
Contribution margin	$610,000	$120,000	$280,000	$210,000
Traceable Fixed expenses	$535,000	$160,000	$200,000	$175,000
Segment/Division margin	$75,000	($40,000)	$80,000	$35,000
Common Fixed expenses	$90,000
Net Operating Income (Loss)	($15,000)

• Requirement 2 [A]

A	Net Loss before	$15,000
B	Net Income now [see working]	$12,000
C = A + B	Net Income increased by	$27,000 Answer

--Working

	Total	East	Central	West
Sales	$1,070,000	$250,000	$400,000	$420,000
Variable expenses	$418,000	$130,000	$120,000	$168,000
Contribution margin	$652,000	$120,000	$280,000	$252,000
Traceable Fixed expenses	$550,000	$160,000	$200,000	$190,000
Segment/Division margin	$102,000	($40,000)	$80,000	$62,000
Common Fixed expenses	$90,000
Net Operating Income (Loss)	$12,000

• Requirement 2 [B]

YES, it is recommended as Net Income is increasing.