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		726,120
Contribution margin		859,880
Fixed expenses		946,000
Net operating income (loss)	$	(86,120)

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	$	436,000		$	620,000		$	530,000
Variable expenses as a percentage of sales		57	%		36	%		48	%
Traceable fixed expenses	$	253,000		$	329,000		$	199,000

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 $23,000 based on the belief that it would increase that division's sales by 17%. 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. Contribution format income statement

	Total	East	Central	West
Sales	$1,586,000	$436,000	$620,000	$530,000
Varible Expenses	$726,120	$248,520	$223,200	$254,400
Contribution margin	$859,880	$187,480	$396,800	$275,600
Traceable Fixed expense	$781,000	$253,000	$329,000	$199,000
Divisional segment margin	$78,880	($65,520)	$67,800	$76,600
Common fixed expenses not traceable	$165,000
Net operating loss	($86,120)

2.a

Incremental sales ($530,000×17%)	$90,100
Contribution margin ($275,600/$530,000)	52%
Incremental Contribution margin	$46,852
Less: Incremental advertising expense	($23,000)
Incremental net operating income	$23,852

2.b Yes, It is recommended to increase advertising as in generates net operating income of $23,852.

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