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	$	1,558,000
Variable expenses		642,600
Contribution margin		915,400
Fixed expenses		1,007,000
Net operating income (loss)	$	(91,600)

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	$	368,000		$	650,000		$	540,000
Variable expenses as a percentage of sales		50	%		34	%		44	%
Traceable fixed expenses	$	288,000		$	339,000		$	198,000

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 $21,000 based on the belief that it would increase that division's sales by 20%. 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