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, which follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) $ 1,639,000 618,920 1,020.080 1,122,000 $ (101,920) In an effort isolate the problem, the president has asked for 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 $ 429,000 48 % $ 298.000 Division Central $ 680,000 28 % $ 328,000 West $ 530.000 42% $ 198.000 Required: 1. Prepare a contribution format income statement segmented by divisions, as desired by the president. Division Total Company East Central West 2-a. As a result of a marketing study, the president believes that sales in the West Division could be increased by 17% if monthly advertising in that division were increased by $22,000. Calculate the incremental net operating income. Incremental net operating income 2-b. Would you recommend the increased advertising? No Yes

Answer 1

D E G H Total Amount 1% 1,639,000 618,920 100% East Amount 100% 429,000 38% 205920 (429,000*48%) 62% 223,080 2980001 -74,920 Division Central Amount % 100% 680,000 48% 190400 (680,000*28%) 52% 489,600 328000 161,600 42% West Amount 100% 530,000 28% 222600 (530,000*42%) 72% 307,400 196000 111,400 58% 1,020,080 822,000 198,080 300,000 -101,920 1 1) 2 3 4. 5 Sales 6 Less: Variable expenses 7 8 Contribution margin 9 Less: Traceable fixed expenses 10 Divisional segment margin 11 Common fixed costs (1,122,000-822,000) 12 Net operating income 13 14 15 2) 16 Incremental sales of west by 17% 17 (530,000*17%) 18 Contribution margin from increase (58%) 19 Less :Advertising expense 20 Incremental net operating income (52258- 220000 21 22 2b) Yes, the advertising expense is recommended 23 24 90,100 52,258 22,000 30,258

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