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	$	1,000,000
Variable expenses		390,000
Contribution margin		610,000
Fixed expenses		625,000
Net operating income (loss)	$	(15,000	)

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	$	250,000		$	400,000		$	350,000
Variable expenses as a percentage of sales		52	%		30	%		40	%
Traceable fixed expenses	$	160,000		$	200,000		$	175,000

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 $15,000 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