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	$	1,587,000
Variable expenses		687,570
Contribution margin		899,430
Fixed expenses		989,000
Net operating income (loss)	$	(89,570)

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		$	660,000		$	570,000
Variable expenses as a percentage of sales		61	%		28	%		50	%
Traceable fixed expenses	$	252,000		$	332,000		$	202,000

Required:

1-a. Prepare a contribution format income statement segmented by divisions.

1-b. 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 18%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?

1-c. Would you recommend the increased advertising?

Answer 1