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, which follows:

  

Sales	$	1,661,000
Variable expenses		739,370
Contribution margin		921,630
Fixed expenses		1,014,000
Net operating income (loss)	$	(92,370)

  

In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

  

	Division
	East			Central			West
Sales	$	441,000		$	650,000		$	570,000
Variable expenses as a percentage of sales		57	%		40	%		40	%
Traceable fixed expenses	$	293,000		$	329,000		$	202,000

  

Required:

1.	Prepare a contribution format income statement segmented by divisions, as desired by the president.

        

2-a.	As a result of a marketing study, the president believes that sales in the West Division could be increased by 15% if monthly advertising in that division were increased by $23,000. Calculate the incremental net operating income.

      

2-b.

Would you recommend the increased advertising?

	Yes
	No

Answer 1

1	Total Company	East	Central	West
Sales	1661000	441000	650000	570000
Variable expenses	739370	251370	260000	228000
Contribution margin	921630	189630	390000	342000
Traceable fixed expenses	824000	293000	329000	202000
Divisional segment margin	97630	-103370	61000	140000
Common fixed expenses not traceable to divisions	190000
Net operating loss	-92370
2a
Incremental sales	85500	=570000*15%
Contribution margin ratio	60%
Incremental contribution margin	51300
Less incremental advertising expense	23000
Incremental net operating income	28300
b
Yes, the advertising program should be initiated.