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	$	1,646,000
Variable expenses		701,700
Contribution margin		944,300
Fixed expenses		1,039,000
Net operating income (loss)	$	(94,700)

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	$	396,000		$	680,000		$	570,000
Variable expenses as a percentage of sales		50	%		33	%		49	%
Traceable fixed expenses	$	263,000		$	337,000		$	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 $26,000 based on the belief that it would increase that division's sales by 19%. 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

	East	Central	west
Sales	$396,000	$680,000	$570,000
Variable cost	($198,000)	($224,400)	($279,300)
Contribution	$198,000	$455,600	$290,700
Traceable Fixed Expense	($ 263,000)	($337,000)	($191,000)
Net income (loss)from each division	($65,000)	$118,600	$ 99,700

2 .a) Spending $ 26,000 on advertising:

		West
	Sales (19% increases)	$ 678,300
	Variable cost 49%	($ 332,367)
	Contribution	$ 345,933
	Traceable Fixed Expense	($ 191,000)
	Fixed advertising expense	($ 26,000)

	Net income for the division	$ 128,933
	Total net income of company before common fixed expense	$ 182,533
	Less common fixed cost	($ 248,000)
	Net income (loss)	$ 65,467

Increases in net income of the company $ 94,700 - $ 65,467 = $ 29,233.

2.b) increased advertising is good for the company it will reduce amount of net loss