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: $ 1,612,000 Sales Variable expenses Contribution margin Fixed expenses 616,660 995,340 1,095,000 Net operating income (loss) (99,660) 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 West $510,000 East Central Sales Variable expenses as a percentage of sales Traceable fixed expenses $432,000 $670,000 588 28% 35% $285,000 $323,000 $205,000 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 $28,000 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?

Answer 1

Requirement: 1 Contribution format Income Statement + Division Sales Less: Variable cost Contribution margin Less: Traceable Fixed cost Divisional segment margin Common fixed expenses Net Operating loss Total company 1612000 616660 995340 813000 182340 282000 -99660 432000 250560 181440 285000 -103560 670000 187600 482400 323000 159400 510000 178500 331500 205000 126500 Requirement: 2a West Division sales Incremental sales @17% Total new sales Less : Variable cost Contribution Incremental contribution (387855 - 331500) Less: Increase in advertising expense (Fixed) Incremental net operating income or (Loss) Net Operating Income Increased by 28355 510000 86700 596700 208845 387855 56355 28000 28355 Requirement: 2b YES, As Incremental profit is $28355 with accepting the increase in advertising expenses. The Proposal is accepted