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, which follows: Sales $ 1,645,000 Variable expenses 549,100 Contribution margin 1,095,900 Fixed expenses 1,205,000 Net operating income (loss) $ (109,100) In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 395,000 $ 670,000 $ 580,000 Variable expenses as a percentage of sales 52 % 21 % 35 % Traceable fixed expenses $ 255,000 $ 336,000 $ 191,000 Required: 1. Prepare a contribution format income statement segmented by divisions, as desired by the president. 2-a. As a result of a marketing study, the president believes that sales in the West Division could be increased by 15% if monthly advertising in that division were increased by $25,000. Calculate the incremental net operating income. 2-b. Would you recommend the increased advertising? Yes No rev: 07_08_2014_QC_50927

Answer 1

a)						Division
					total	East	Central	West
					company
Sales					1,645,000	395,000	670,000	580,000
less variable expense					549,100	205400	140700	203000
Contribution margin					1,095,900	189,600	529,300	377,000
Traceable fixed expense					782,000	255,000	336,000	191,000
Divisional segment margin					313,900	-65,400	193,300	186,000
common fixed expenses not traceable to divisions					423,000
net operating loss					-109,100
b)
	increase in contribution 580,000*15%*65%=						56550
	less increase in advertising						25,000
	net operating income increases by						31,550
	net operating income will increase by				31,550
c)	yes