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 $ 1,586,000 Variable expenses 594,080 Contribution margin 991,920 Fixed expenses 1,091,000 Net operating income (loss) $ (99,080) 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 $ 366,000 $ 660,000 $ 560,000 Variable expenses as a percentage of sales 48 % 32 % 37 % Traceable fixed expenses $ 261,000 $ 336,000 $ 200,000 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 $28,000 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

Total Sales	$1,586,000
Variable Expenses	$594,080
Contribution	$991,920
Fixed Expenses	$1,091,000
Net Operating Income / (Loss)	-$99,080

1. Contribution format income statement segmented by divisions:-

Income Statement segmented by Division
Particulars	Division East	Division Central	Division West	Total
Sales (A)	$366,000	$660,000	$560,000	$1,586,000
Variable Expenses (% of sales)	48%	32%	37%	-
Variable Expenses (B)	$175,680	$211,200	$207,200	$594,080
Contribution '(C ) (A-B)	$190,320	$448,800	$352,800	$991,920
Tracable Fixed Expenses (D)	$261,000	$336,000	$200,000	$797,000
Non Tracable Fixed Expenses	-	-	-	$294,000
Net Operating Income / (Loss) (C-D)	-$70,680	$112,800	$152,800	-$99,080

2 (a) If Advertising expenditure is allowed at west division :-

Revised Income Statement:-
Additional Sales at west Division (A)	$106,400
($5,60,000*19%)
Less :- Variable Expenses @37% for Additional Sales (B)	$39,368
Additional Contribution (C )	$67,032
Additonal Expense (Advertising) (D)	$28,000
Net Increase in Income (C-D)	$39,032

2 (b) Conclusion :- By incurring additional advertisment expenditure of $28,000, net operating income of firm is increasing by $39,032. So it's recommended to incure additional advertising expenditure.