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

Answer 1.

Contribution Income statement division wise
	DIVISION
	EAST	CENTRAL	WEST
Sales	366000	660000	560000
Less: Variable Expenses	175680	211200	207200
Contribution Margin	190320	448800	352800
Less: Traceable Fixed expense	261000	336000	200000
Operating Profit	-70680	112800	152800
Operating Profit	194920
Less: Non Traceable Fixed Expense	294000
Net Operating Profit	-99080

Answer 2 a:

Contribution Income statement division wise after increasing advertising expense of West Division
	DIVISION
	EAST	CENTRAL	WEST
Sales	366000	660000	666400
Less: Variable Expenses	175680	211200	246568
Contribution Margin	190320	448800	419832
Less: Traceable Fixed expense	261000	336000	228000
Operating Profit	-70680	112800	191832
Operating Profit	233952
Less: Non Traceable Fixed Expense	266000
Net Operating Profit	-32048

Companies Net Operating Income has increased by 67032 i.e. (99080 - 32048)

Answer 2 b: Yes, I would recommend the increased advertising as Net Operating Loss has been reduced to 32048 from 99080.