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	$	1,675,000
Variable expenses		694,100
Contribution margin		980,900
Fixed expenses		1,079,000
Net operating income (loss)	$	(98,100)

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	$	415,000		$	670,000		$	590,000
Variable expenses as a percentage of sales		46	%		39	%		41	%
Traceable fixed expenses	$	293,000		$	331,000		$	191,000

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 $28,000 based on the belief that it would increase that division's sales by 12%. 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
		Division
	Total Company	East	Central	West
Sales	1675000	415000	670000	590000
Variable expenses	694100	190900	261300	241900
Contribution margin	980900	224100	408700	348100
Traceable fixed expenses	815000	293000	331000	191000
Divisional segment margin	165900	(68900)	77700	157100
Common fixed expenses not traceable to divisions	264000
Net operating loss	(98100)
2
Incremental West Division sales	70800	=590000*12%
X Contribution margin ratio	59%	=1-41%
Incremental contribution margin	41772
Less incremental advertising expense	28000
Net operating income increase	13772
b
Yes, the advertising program should be initiated.