Question

Exercise 6-11 (Algo) 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	$	1,642,000
Variable expenses		668,840
Contribution margin		973,160
Fixed expenses		1,070,000
Net operating income (loss)	$	(96,840)

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	$	412,000		$	650,000		$	580,000
Variable expenses as a percentage of sales		52	%		28	%		47	%
Traceable fixed expenses	$	259,000		$	334,000		$	204,000

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 $23,000 based on the belief that it would increase that division's sales by 18%. 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 Requirement 1:

Answer to Requirement 2:

Contribution Margin Ratio = 100% - Variable Expenses Ratio
Contribution Margin Ratio = 100% - 47%
Contribution Margin Ratio = 53%

Increase in Fixed Expenses = $23,000

Increase in Sales = 18% * $580,000
Increase in Sales = $104,400

Increase in Operating Income = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Expenses
Increase in Operating Income = $104,400 * 53% - $23,000
Increase in Operating Income = $55,332 - $23,000
Increase in Operating Income = $32,332

Yes, West Division should increase their advertising expense as it will increase operating income.