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	$	1,607,000
Variable expenses		575,850
Contribution margin		1,031,150
Fixed expenses		1,134,000
Net operating income (loss)	$	(102,850)

  

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	$	417,000		$	650,000		$	540,000
Variable expenses as a percentage of sales		45	%		24	%		43	%
Traceable fixed expenses	$	278,000		$	321,000		$	198,000

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 17% if monthly advertising in that division were increased by $29,000. Calculate the incremental net operating income.

2-b.	Would you recommend the increased advertising?

(Just need the answer please. Thank you.)

Answer 1

1.

Contribution margin Income Statement
	Total	East	Central	West
Sales	$16,07,000	$4,17,000	$6,50,000	$5,40,000
Variable cost	$5,75,850	$1,87,650	$1,56,000	$2,32,200
Contribution margin	$10,31,150	$2,29,350	$4,94,000	$3,07,800
Traceable fixed expense	$7,97,000	$2,78,000	$3,21,000	$1,98,000
Segment margin	$2,34,150
Common fixed expense	$3,37,000
Net oprating loss	-$1,02,850

2.

Incremental Net operating income =(100% - 43%) X ($540,000 X 17%) - $29,000 = $23,326

3.

Yes. Advertising should be increased.