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	$	1,564,000
Variable expenses		618,120
Contribution margin		945,880
Fixed expenses		1,040,000
Net operating income (loss)	$	(94,120)

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	$	444,000		$	620,000		$	500,000
Variable expenses as a percentage of sales		43	%		31	%		47	%
Traceable fixed expenses	$	278,000		$	325,000		$	202,000

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 14%. 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

Answer:

1.

		Division
	Total Company	East	Central	West
Sales	$1564000	$444000	$620000	$500000
Variable expenses	618120	190920(43%)	192200(31%)	235000(47%)
Contribution margin	945880	253080	427800	265000
Traceable fixed expenses	805000	278000	325000	202000
Divisional segment margin	140880	$(24920)	$ 102800	$ 63000
Common fixed expenses not traceable to divisions*	235000
Net operating income (loss)	$ (94120)

  *$1040000 – $805000 = $235000.

2.

a.

Incremental sales ($500000 × 14%)	$70,000
Contribution margin ratio ($265000 ÷ $500,000)	× 53%
Incremental contribution margin	$37100
Less incremental advertising expense	94120
Incremental net operating income	$(57020)

b. no, the advertising program should not be initiated.