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	$	1,636,000
Variable expenses		584,400
Contribution margin		1,051,600
Fixed expenses		1,157,000
Net operating income (loss)	$	(105,400)

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	$	446,000		$	690,000		$	500,000
Variable expenses as a percentage of sales		45	%		23	%		45	%
Traceable fixed expenses	$	259,000		$	336,000		$	192,000

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 13%. 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

		Division
	Total company	East	Central	West
Sales	1636000	446000	690000	500000
Variable expenses	584400	200700	158700	225000
Contribution margin	1051600	245300	531300	275000
Traceable fixed expenses	787000	259000	336000	192000
Divisional segment margin	264600	-13700	195300	83000
Common fixed expenses not traceable to divisions	370000
Net operating loss	-105400
2a
Incremental West Division sales	65000	=500000*13%
Contribution margin ratio	55%
Incremental contribution margin	35750
Less incremental advertising expense	27000
Incremental net operating income	8750
Net operating income increases by $8750
2b
Yes, the advertising program should be initiated.