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, which follows: Sales $ 1,000,000 Variable expenses 390,000 Contribution margin 610,000 Fixed expenses 625,000 Net operating income (loss) $ (15,000) In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 250,000 $ 400,000 $ 350,000 Variable expenses as a percentage of sales 52 % 30 % 40 % Traceable fixed expenses $ 160,000 $ 200,000 $ 175,000 Required:

1. Prepare a contribution format income statement segmented by divisions, as desired by the president.

2-a. As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Calculate the incremental net operating income.

2-b. Would you recommend the increased advertising? Yes No

Answer 1

1	Wingate Company
	Contribution format income statement
		East	Central	West	Total
	Sales	$          250,000	$          400,000	$          350,000	$        1,000,000
	Less: Variable expenses	$       (130,000)	$       (120,000)	$       (140,000)	$         (390,000)
		(Sales *52%)	(Sales *30%)	(Sales *40%)
	Contribution Margin	$          120,000	$          280,000	$          210,000	$            610,000
	Less: Traceable fixed expenses	$       (160,000)	$       (200,000)	$       (175,000)	$         (535,000)
	Segment Profit	$          (40,000)	$            80,000	$            35,000	$              75,000
	Less: Non traceable fixed costs (625000-535000)				$            (90,000)
	Net operating income (loss)				$            (15,000)
2-a	Calculation of incremental net operating income:
	Increase in sales in the West Division (350000*20%)	$            70,000
	Less: Incremental Variable expenses (70000*40%)	$          (28,000)
	Incremental Contribution Margin	$            42,000
	Less: Incremental fixed costs	$          (15,000)
	Incremental net operating income	$            27,000
2-b	Yes increase in advertisement is positive, because it results in increase in net operating income.