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	$	1,714,000
Variable expenses		672,060
Contribution margin		1,041,940
Fixed expenses		1,146,000
Net operating income (loss)	$	(104,060)

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	$	444,000		$	680,000		$	590,000
Variable expenses as a percentage of sales		54	%		28	%		41	%
Traceable fixed expenses	$	287,000		$	333,000		$	206,000

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 $22,000 based on the belief that it would increase that division's sales by 19%. 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

In contrast to fixed expenses, variable expenses respond, often in direct proportion, to changing or fluctuating production levels or sales volumes. ... Advertising is a component in your marketing budget, and you can classify those expenses as variable.

Answer:

Contribution format income statement(Division wise)

	Region ($)	East	Central	West
Components
Sales		444000	680000	590000
Variable cost		239760(54% ,sales)	190400	241900
Contribution margin		204240	489600	348100
Fixed cost		287000	333000	206000
Net operating income Profit\ Loss		82760(Loss)	156600	142100

2. If Advertising has undertaken for $ 22000 in west then the sales of that region will be increased by 19%

Sales of west region 590000

19% of 590000 112000

Then new contribution will be   

sales 702000 (590000+112000)

Variable cost 241900

Advertising expense 22000

Contribution 438100

Fixed cost 206000

Profit 232100

The company's net operating income has increased due to the proposal.

3. It is advisable to implement the proposal as a  small amount of advertising leads to large increase in both contribution and profit margin.