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) $1,000,000 390,000 610,000 625,000 $ (15,000) 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 Division East Central West $250,000 $400,000 $350,000 52% 30% 40% $ 160,000 $200,000 $175,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2. The Marketing Department has proposed increasing the West Division's monthly advertising by $15.000 based on the belief that it would increase that division's sales by 20%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?

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 1000000 390000 610000 535000 75000 90000 - 15000 East 250000 130000 120000 160000 -40000 Division Central 400000 120000 280000 200000 80000 West 350000 140000 210000 175000 35000 Requirement: 2a West Division sales Incremental sales @20% Total new sales Less : Variable cost Contribution Incremental contribution (252000 - 210000) Less: Increase in advertising expense (Fixed) Incremental net operating income or (Loss) Net Operating Income Increased by 27000 350000 70000 420000 168000 252000 42000 15000 27000 Requirement: 2b YES, As Incremental profit is $27000 with accepting the increase in advertising expenses. The Proposal is accepted