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 $ 1,550,000 Variable expenses 603,500 Contribution margin 946,500 Fixed expenses 1,041,000 Net operating income (loss) $ (94,500) 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 $ 390,000 $ 640,000 $ 520,000 Variable expenses as a percentage of sales 45 % 36 % 38 % Traceable fixed expenses $ 284,000 $ 322,000 $ 207,000 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 $25,000 based on the belief that it would increase that division's sales by 15%. 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? 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 $ 1,550,000 Variable expenses 603,500 Contribution margin 946,500 Fixed expenses 1,041,000 Net operating income (loss) $ (94,500) 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 $ 390,000 $ 640,000 $ 520,000 Variable expenses as a percentage of sales 45 % 36 % 38 % Traceable fixed expenses $ 284,000 $ 322,000 $ 207,000 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 $25,000 based on the belief that it would increase that division's sales by 15%. 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

Ques 1
	Total	East	Central	West
Sales	$       1,550,000	$ 390,000	$ 640,000	$ 520,000
Variable expenses	$           603,500	$ 175,500	$ 230,400	$ 197,600
(45%/36%/38%)*sales
Contribution margin	$           946,500	$ 214,500	$ 409,600	$ 322,400
Traceable fixed expenses	$           813,000	$ 284,000	$ 322,000	$ 207,000
divisional segment margin	$           133,500	$ (69,500)	$    87,600	$ 115,400
Common fixed expenses	$           228,000
(1041000-813000)
Net operating loss	$           (94,500)
Ques 2-a
Incremental west division sales	520000*0.15	78000
Contribution margin ratio	322400/520000	62%
Incremental contribution margin		48360
Less:incremental advertising expense		25000
incremental net operating income		23360
Ques 2-b
yes the advertising program should be initiated