Question

Exercise 6-11 Segmented Income Statement [LO6-4]

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	$	1,594,000
Variable expenses		570,440
Contribution margin		1,023,560
Fixed expenses		1,126,000
Net operating income (loss)	$	(102,440)

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	$	434,000		$	600,000		$	560,000
Variable expenses as a percentage of sales		46	%		31	%		33	%
Traceable fixed expenses	$	250,000		$	333,000		$	209,000

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 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

1
		Division
	Total Company	East	Central	West
Sales	1594000	434000	600000	560000
Variable expenses	570440	199640	186000	184800
Contribution margin	1023560	234360	414000	375200
Traceable fixed expenses	792000	250000	333000	209000
Divisional segment margin	231560	-15640	81000	166200
Common fixed expenses not traceable to divisions	334000
Net operating loss	(102440)
2a
Incremental West Division sales	78400	=560000*14%
X Contribution margin ratio	67%	=1-33%
Incremental contribution margin	52528
Less incremental advertising expense	25000
Net operating income increase	27528
b
Yes, the advertising program should be initiated.