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	$	1,691,000
Variable expenses		561,990
Contribution margin		1,129,010
Fixed expenses		1,242,000
Net operating income (loss)	$	(112,990)

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	$	411,000		$	700,000		$	580,000
Variable expenses as a percentage of sales		49	%		25	%		32	%
Traceable fixed expenses	$	293,000		$	333,000		$	207,000

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 19%. 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?

Answer 1

1.

	Total	East division	Central Division	West division
Sales	$1,691,000	$411,000	$700,000	$580,000
Less: Variable costs	$561,990	$201,390	$175,000	$185,600
Contribution margin	$1,129,010	$209,610	$525,000	$394,400
Less:Traceable fixed costs	$833,000	$293,000	$333,000	$207,000
Divisional segment margin	$296,010	($83,390)	$192,000	$187,400
Common fixed expenses not traceable	$409,000
Net operating income (loss)	($112,990)

2a.

Incremental sales in west division =$580,000×19% =$110,200

Contribution margin (100-32=68%) =$110,200×68%

=$74,396

Less: Increase in advertising expenses =$27,000

Net income increases =$47,936($74,396-$27,000)

2b.

Yes, The advertising program should be accepted.