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	$	1,579,000
Variable expenses		691,900
Contribution margin		887,100
Fixed expenses		976,000
Net operating income (loss)	$	(88,900)

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	$	449,000		$	610,000		$	520,000
Variable expenses as a percentage of sales		50	%		34	%		50	%
Traceable fixed expenses	$	269,000		$	327,000		$	198,000

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 $27,000 based on the belief that it would increase that division's sales by 18%. 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?

Reg 1 Req 2A Req 2B Prepare a contribution format income statement segmented by divisions. Division Total Company East Central West 0 0 0 0 0 $ 0 $ 0 $ 0 $ 0

Answer 1

Ans.1. The contribution income statement segmented by divisions is presented as below:

Contribution format income statement
		Division
	Total Company	East	Central	West
Sales	$1,579,000	$449,000	$610,000	$520,000
Less: Variable expenses	$691,900	$224,500	$207,400	$260,000
Contribution margin	$887,100	$224,500	$402,600	$260,000
Less: Traceable fixed expenses	$794,000	$269,000	$327,000	$198,000
Segment income (loss)	$93,100	-$44,500	$75,600	$62,000
Less: Common fixed expenses	$182,000
Net operating income(loss)	-$88,900

Working notes:

1. All line item numbers of total Company (sales, variable expenses, contribution margin, traceable fixed expenses) are sum of the line item numbers of the three divisions.

2. Variable expenses for East division = 50%*$449,000, for Central division= 34%*$610,000 and for West division =50%*$520,000.

3. Contribution margin = Sales – Variable expenses

4. Traceable fixed expenses are those fixed expenses which can be specifically identified with each division.

5. Segment income(loss) for each division = Contribution margin for the segment – Traceable fixed expenses for the segment. Total segment income = Sum of all three divisions’ segment income.

6. Common fixed expenses are deducted from total segmental income to arrive at net loss.

Ans.2A. If monthly advertising for West division is increased by $27,000, it will increase the traceable fixed expenses of West division by $27,000,i.e., traceable fixed expenses will be $198,000+$27,000 = $225,000, and if sales are increased by 18%, new sales will be $520,000 * 1.18 = $613,600. New Variable expenses will be 50%*$613,600 = $306,800.

The new contribution income statement will be as follows:

Contribution format income statement
		Division
	Total Company	East	Central	West
Sales	$1,672,600	$449,000	$610,000	$613,600
Less: Variable expenses	$738,700	$224,500	$207,400	$306,800
Contribution margin	$933,900	$224,500	$402,600	$306,800
Less: Traceable fixed expenses	$821,000	$269,000	$327,000	$225,000
Segment income (loss)	$112,900	-$44,500	$75,600	$81,800
Common fixed expenses	$155,000
Net operating income(loss)	-$42,100

Ans.2B. We see that the change is positive. The income of West division increases to $81,800 from $62,000 with the proposed change. Also, the net operating loss of the Company reduces from $88,900 to $42,100.

Therefore, the increased advertising is recommended.