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) $ 1,609,000 671,450 937,550 1,031,000 $ (93,450) 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% $283,000 Division Central $670,000 32% $337,000 West $540,000 44% $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 $22,000 based on the belief that it would increase that division's sales by 14%. 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 Sales Less: Variable cost Contribution margin Less: Traceable Fixed cost Divisional segment margin Common fixed expenses Net Operating loss Total company 1609000 671450 937550 823000 114550 208000 -93450 Division East Central 399000 670000 219450 2 14400 179550 455600 2830001 3370001 -103450 118600 West 540000 237600 302400 203000 99400 Requirement: 2a West Division sales Incremental sales @14% Total new sales Less : Variable cost Contribution Incremental contribution (344736 - 302400) Less: Increase in advertising expense (Fixed) Incremental net operating income or (Loss) Net Operating Income Increased by 20336 540000 75600 615600 270864 344736 42336 22000 20336 Requirement: 2b YES, As Incremental profit is $20336 with accepting the increase in advertising expenses. The Proposal is accepted