Question

Bovine Company, a wholesale distributor of umbrellas, has been experiencing losses for some time
as shown by its most recent montly contribution format income statement
	Sales    ...............................................$				2,000,000
	Variable Expenses..........................				792,000
	Contribution margin				1,208,000
	Fixed Expenses				1,305,000
	Operating loss    $				-97,000
In an effort to isolate the problem, the president has asked for an income statement segmented by
geographic market. Accordingly the Accounting Dept has developed the following:
					Geographic Market
					South	Central	North
Sales ....................................................$					600,000	800,000	600,000
Variable expenses as % of sales					52%	30%	40%
Traceable fixed expenses.....................$					320,000	530,000	300,000
1) Prepare a contribution format income statement segmented by geographic market, as suggested by the president
2) The Company's sales manager believes that sales in the Central geographic market could be increased
by 15% if monthly advertising is increased by $25,000.   Would you recommend the increased advertising?
Show computations to suport your answer

Answer 1

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Part 1
		South	Central	North	Total
Sales		$     600,000	$     800,000	$     600,000	$   2,000,000
Less Variable Expense	52%,30%,40%	$   -312,000	$   -240,000	$   -240,000	$     -792,000
Contribution margin		$     288,000	$     560,000	$     360,000	$   1,208,000
Less: Traceable Fixed Expense		$     320,000	$     530,000	$     300,000	$   1,150,000
Geography Income		$     -32,000	$       30,000	$       60,000	$         58,000
Less: Untracable Expense	$1,305,000-$1,150,000				$     -155,000
Total Net Income					$       -97,000
Part 2
Incremental Revenue	$800,000*15%	$     120,000
Less: Variable Expense	$240,000*15%	$     -36,000
Incremental Contribution margin		$       84,000
Less: Additional Advertising		$     -25,000
Incremental Income		$       59,000
Yes, increased advertising is recommended