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	$	1,535,000
Variable expenses		567,600
Contribution margin		967,400
Fixed expenses		1,064,000
Net operating income (loss)	$	(96,600)

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	$	375,000		$	620,000		$	540,000
Variable expenses as a percentage of sales		44	%		24	%		47	%
Traceable fixed expenses	$	261,000		$	326,000		$	202,000

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 $22,000 based on the belief that it would increase that division's sales by 14%. 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	1535000	375000	620000	540000
Variable expenses	567600	165000	148800	253800
Contribution margin	967400	210000	471200	286200
Traceable fixed expenses	789000	261000	326000	202000
Divisional segment margin	178400	(51000)	145200	84200
Common fixed expenses not traceable to divisions	275000
Net operating loss	(96600)
2
Incremental West Division sales	75600	=540000*14%
X Contribution margin ratio	53%	=1-47%
Incremental contribution margin	40068
Less incremental advertising expense	22000
Net operating income increase	18068
b
Yes, the advertising program should be initiated.