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	$	1,586,000
Variable expenses		594,080
Contribution margin		991,920
Fixed expenses		1,091,000
Net operating income (loss)	$	(99,080)

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	$	366,000		$	660,000		$	560,000
Variable expenses as a percentage of sales		48	%		32	%		37	%
Traceable fixed expenses	$	261,000		$	336,000		$	200,000

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 $28,000 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

Segment -wise Income Statement	East	Central	West	Total
Sales	366000	660000	560000	1586000
Less:Variable costs	-175680	-211200	-207200	-594080
Contribution margin	190320	448800	352800	991920
Less: Traceable fixed expenses	-261000	-336000	-200000	-797000
Segment NOI/(loss)	-70680	112800	152800	194920
Less:Common fixed costs(1091000-797000)				-294000
Net operating income (loss)				-99080

2-a.. Company's NOI will Increase by

Increase in sales of West division-Increase in its advertising expenses

ie. (560000*19%)-28000=

78400

So loss will be reduced by $ 78400

The NOI will be -99080+78400=

-20680

2-b.Recommend the increased advertising , as it brings net positive income & the current loss is reduced , by that extent, namely, $ 78400