Question

Exercise 4-11 (Algo) Segmented Income Statement [LO4-4]

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	$	1,502,000
Variable expenses		532,460
Contribution margin		969,540
Fixed expenses		1,066,000
Net operating income (loss)	$	(96,460)

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	$	382,000		$	610,000		$	510,000
Variable expenses as a percentage of sales		53	%		24	%		36	%
Traceable fixed expenses	$	250,000		$	338,000		$	195,000

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 $25,000 based on the belief that it would increase that division's sales by 12%. 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

• Requirement 1

	Total	East	Central	West
Sales	$1,502,000	$382,000	$610,000	$510,000
Variable expenses	$532,460	$202,460	$146,400	$183,600
Contribution margin	$969,540	$179,540	$463,600	$326,400
Traceable Fixed expenses	$783,000	$250,000	$338,000	$195,000
Segment/Division margin	$186,540	($70,460)	$125,600	$131,400
Common Fixed expenses	$283,000
Net Operating Income (Loss)	($96,460)

• Requirement 2 [a]

--Working

	Total	East	Central	West
Sales	$1,563,200	$382,000	$610,000	$571,200
Variable expenses	$554,492	$202,460	$146,400	$205,632
Contribution margin	$1,008,708	$179,540	$463,600	$365,568
Traceable Fixed expenses	$808,000	$250,000	$338,000	$220,000
Segment/Division margin	$200,708	($70,460)	$125,600	$145,568
Common Fixed expenses	$283,000
Net Operating Income (Loss)	($82,292)

--Answer

A	Net Loss before	$96,460
B	Net Loss now	$82,292
C = A - B	Net Income increased by	$14,168 ANSWER

• Requirement 2 [b]

YES, because it increases the Net Income (or one can say that it is decreasing the Net Loss)