Question

Exercise 6-11 Segmented Income Statement [LO6-4]

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	$	1,477,000
Variable expenses		576,990
Contribution margin		900,010
Fixed expenses		990,000
Net operating income (loss)	$	(89,990)

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	$	367,000		$	600,000		$	510,000
Variable expenses as a percentage of sales		57	%		29	%		38	%
Traceable fixed expenses	$	299,000		$	329,000		$	201,000

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 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

• Requirement 1

	Total	East	Central	West
Sales	$1,477,000	$367,000	$600,000	$510,000
Variable expenses	$576,990	$209,190	$174,000	$193,800
Contribution margin	$900,010	$157,810	$426,000	$316,200
Traceable Fixed expenses	$829,000	$299,000	$329,000	$201,000
Segment/Division margin	$71,010	($141,190)	$97,000	$115,200
Common Fixed expenses	$161,000
Net Operating Income (Loss)	($89,990)

• Requirement 2 Working

	Total	East	Central	West
Sales	$1,573,900	$367,000	$600,000	$606,900
Variable expenses	$613,812	$209,190	$174,000	$230,622
Contribution margin	$960,088	$157,810	$426,000	$376,278
Traceable Fixed expenses	$851,000	$299,000	$329,000	$223,000
Segment/Division margin	$109,088	($141,190)	$97,000	$153,278
Common Fixed expenses	$161,000
Net Operating Income (Loss)	($51,912)

• Requirement 2A

Net Loss before	$89,990
Net Loss now	$51,912
Net Income increased by	$38,078

• Requirement 2B

YES, because increase in contribution margin is MORE than increase in fixed cost, leading to increase in net income by $ 38078