Question

A)

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 (los) $ 1,585,000 585,650 999,350 1,099,000 $ 99,650) 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 $375,000 458 $252,000 Division Central $660,000 24 $329,000 West $550,000 478 $193,000 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 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?

B)

Answer 1

1
		Division
	Total Company	East	Central	West
Sales	1585000	375000	660000	550000
Variable expenses	585650	168750	158400	258500
Contribution margin	999350	206250	501600	291500
Traceable fixed expenses	774000	252000	329000	193000
Divisional segment margin	225350	(45750)	172600	98500
Common fixed expenses not traceable to divisions	325000
Net operating loss	(99650)
2
Incremental West Division sales	93500	=550000*17%
X Contribution margin ratio	53%	=1-47%
Incremental contribution margin	49555
Less incremental advertising expense	25000
Net operating income will increase by	24555
b
Yes, the advertising program should be initiated.