Question

9.

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) $ 1,554,000 545,180 1,008,820 1,110,000 $ (101,180) 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 Central $ 680,000 East $ 354,000 478 $260,000 Sales Variable expenses as a percentage of sales Traceable fixed expenses 328 West $520,000 31% $194,000 $329,000 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 17%. 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Req 2B Prepare a contribution format income statement segmented by divisions. Division Central Total Company East West

Answer 1

1
		Division
	Total Company	East	Central	West
Sales	1554000	354000	680000	520000
Variable expenses	545180	166380	217600	161200
Contribution margin	1008820	187620	462400	358800
Traceable fixed expenses	783000	260000	329000	194000
Divisional segment margin	225820	-72380	133400	164800
Common fixed expenses not traceable to divisions	327000
Net operating loss	(101180)
2
Incremental West Division sales	88400	=520000*17%
X Contribution margin ratio	69%	=1-31%
Incremental contribution margin	60996
Less incremental advertising expense	24000
Net operating income increase	36996
b
Yes, the advertising program should be initiated.