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	$	1,569,000
Variable expenses		656,910
Contribution margin		912,090
Fixed expenses		1,003,000
Net operating income (loss)	$	(90,910)

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	$	429,000		$	630,000		$	510,000
Variable expenses as a percentage of sales		59	%		39	%		31	%
Traceable fixed expenses	$	262,000		$	327,000		$	197,000

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 16%. 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

Solution:-

1. Prepare a contribution format income statement segmented by divisions:-

	Total Company	Division
		East	Central	West
Sales	1,569,000	429,000	630,000	510,000
Variable expenses	656,910	253,110	245,700	158,100
Contribution margin	912,090	175,890	384,300	351,900
Traceable fixed expenses	786,000	262,000	327,000	197,000
Divisional segment margin	126,090	(86,110)	57,300	154,900
Common fixed expenses not traceable to division	217,000
Net operating loss	(90,910)

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 16%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented:-

Incremental West Division sales ($510,000 × 16%)	81,600
Contribution margin ratio ($351,900 ÷ $510,000)	69%
Incremental contribution margin	56,304
Less incremental advertising expense	26,000
Incremental net operating income	30,304

2-b. Would you recommend the increased advertising:-

Yes, the advertising program should be initiated.