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	$	1,527,000
Variable expenses		592,420
Contribution margin		934,580
Fixed expenses		1,028,000
Net operating income (loss)	$	(93,420)

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	$	357,000		$	640,000		$	530,000
Variable expenses as a percentage of sales		56	%		34	%		33	%
Traceable fixed expenses	$	290,000		$	339,000		$	208,000

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 $22,000 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?
__________________________________________________________________________________________________

Prepare a contribution format income statement segmented by divisions.

		Division
	Total Company	East	Central	West
Sales .
	0	0	0	0
	0	$0	$0	$0
	$0

_____________________________________________________________________________

The Marketing Department has proposed increasing the West Division's monthly advertising by $22,000 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? (Do not round intermediate calculations.)

Net operating income will

by

________________________________________________________________________

Would you recommend the increased advertising?

Yes or No?

Answer 1

1
		Division
	Total Company	East	Central	West
Sales	1527000	357000	640000	530000
Variable expenses	592420	199920	217600	174900
Contribution margin	934580	157080	422400	355100
Traceable fixed expenses	837000	290000	339000	208000
Divisional segment margin	97580	-132920	83400	147100
Common fixed expenses not traceable to divisions	191000
Net operating loss	(93420)
2
Incremental West Division sales	74200	=530000*14%
X Contribution margin ratio	67%
Incremental contribution margin	49714
Less incremental advertising expense	22000
Net operating income will increase by	27714
b
Yes, the advertising program should be initiated.