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	$	1,612,000
Variable expenses		541,980
Contribution margin		1,070,020
Fixed expenses		1,177,000
Net operating income (loss)	$	(106,980)

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	$	402,000		$	620,000		$	590,000
Variable expenses as a percentage of sales		54	%		21	%		33	%
Traceable fixed expenses	$	290,000		$	330,000		$	209,000

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 $21,000 based on the belief that it would increase that division's sales by 17%. 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

1.

Contribution margin Income statement
	Total	East	central	West
Sales	$ 16,12,000.00	$ 4,02,000.00	$    6,20,000.00	$   5,90,000.00
less:Variable expense	$    5,41,980.00	$ 2,17,080.00	$    1,30,200.00	$   1,94,700.00
Contribution	$ 10,70,020.00	$ 1,84,920.00	$    4,89,800.00	$   3,95,300.00
less:traceable fixed cost	$    8,29,000.00	290000	330000	209000
SEgment income	$    2,41,020.00	$-1,05,080.00	$    1,59,800.00	$   1,86,300.00
less:common fixed cost	$    3,48,000.00
Net Income	$   -1,06,980.00

2-a.

contribution margin ratio of west :395,300/590000=.67

Increase in sales : 590000*.17 = 100300

increase in contribution : 100300*.67 = 67201

Net operating income will increase by : 67201 -21000 = $ 46201

2-b

YES,as ney operating income will increase by 46201