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 Variable expenses Contribution margin Fixed expenses Net operating income (loss) 1,619,000 693,650 925,350 1,018,000 (92,650) $ 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: Sales Variable expenses as a percentage of sales Traceable fixed expenses East $399,000 55% $ 292,000 Division Central $620,000 31% $325,000 West $600,000 47% $203,000 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 $23,000 based on the belief that it would increase that division's sales by 18%. 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

PART 1

	Division			Total
	East	Central	West
Sales	$399,000	$620,000	$600,000	$1,619,000
Variable expenses	$219,450	$192,200	$282,000	$693,650
Contribution margin	$179,550	$427,800	$318,000	$925,350
Traceable fixed expenses	$292,000	$325,000	$203,000	$820,000
Segment margin	($112,450)	$102,800	$115,000	$105,350
Common fixed costs				($198,000)
Net operating income/(Loss)				($92,650)

PART 2

Variable cost ratio of west division = 47%

Contribution margin ratio of west division = 1 – 0.47 = 0.53 = 53%

Incremental sales = $ 600,000 * 18% = $ 108000

Incremental contribution margin = $108000 * 53% = $ 57240

Incremental advertisement cost = $23000

Incremental net operating income = $57240 - $23,000 = $ 34240

Thus, net operating income will increase by $ 34,240

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