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	$	1,613,000
Variable expenses		594,690
Contribution margin		1,018,310
Fixed expenses		1,120,000
Net operating income (loss)	$	(101,690)

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	$	393,000		$	650,000		$	570,000
Variable expenses as a percentage of sales		53	%		27	%		37	%
Traceable fixed expenses	$	266,000		$	338,000		$	195,000

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 13%. 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

Answer to 1
Particulars	Total	East	Central	West
Sales	1613000	393000	650000	570000
Less: Variable expenses	594690	208290	175500	210900
		393000*53%	650000*27%	570000*37%
Contribution Margin	1018310	184710	474500	359100
Less: Fixed expenses	799000	266000	338000	195000
Net operating Income/(Loss)	219310	-81290	136500	164100
Common fixed expenses not traceable to divisions (1120000 - 799000)	321000
Net operating Loss	-101690
Answer to 2 (a)
Particulars	Total	East	Central	West
Sales	1687100	393000	650000	644100
				570000*113%
Less: Variable expenses	622107	208290	175500	238317
		393000*53%	650000*27%	644100*37%
Contribution Margin	1064993	184710	474500	405783
Less: Fixed expenses	825000	266000	338000	221000
				195000+26000
Net operating Income/(Loss)	239993	-81290	136500	184783
Common fixed expenses not traceable to divisions (1120000 - 799000)	295000
Net operating Loss	-55007
Answer to 2 (b)
Yes, the increased advertising costs would be recommended as it results in increase in division net operating income