Question

Exercise 7-11 Segmented Income Statement [LO7-4]

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	$	1,546,000
Variable expenses		573,480
Contribution margin		972,520
Fixed expenses		1,070,000
Net operating income (loss)	$	(97,480)

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	$	416,000		$	630,000		$	500,000
Variable expenses as a percentage of sales		48	%		26	%		42	%
Traceable fixed expenses	$	282,000		$	324,000		$	206,000

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 13%. 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

Segmented Contribution Income Statement
			East	Central	West	Total
Sales			416000	630000	500000	1546000
Less: Variable cost			199680	163800	210000	573480
Contribution margin			216320	466200	290000	972520
Less: Traceable fixed cost			282000	324000	206000	812000
Net income			-65680	142200	84000	160520
Req 2-a:
Incremental analysis
Increase in Sales (500000*13%)				65,000
CM ratio (100-42)				58%
Increase in Contribution				37,700
Less: Increased advertisement fixed cost				28,000
Increase in Income				9,700
Req 2-b:
Yes, the increased advertising expenses is recommended