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	$	1,561,000
Variable expenses		548,660
Contribution margin		1,012,340
Fixed expenses		1,114,000
Net operating income (loss)	$	(101,660)

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	$	381,000		$	670,000		$	510,000
Variable expenses as a percentage of sales		46	%		23	%		43	%
Traceable fixed expenses	$	284,000		$	329,000		$	209,000

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 $25,000 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

1
	Contribution format income statement segmented by divisions :
			Division
		Total company	East	Central	West
	Sales	1561000	381000	670000	510000
	Variable expenses	548660	175260	154100	219300
	Contribution margin	1012340	205740	515900	290700
	Traceable fixed expenses	822000	284000	329000	209000
	Divisional segment margin	190340	(78260)	186900	81700
	Common fixed expenses not traceable to divisions	292000
	Net operating loss	(101660)

Working :
Common fixed expenses not traceable to divisions = Total fixed expenses - Total traceable fixed expenses = 1114000 - 822000	292000

2A	If sales is increased by 19% without any change in the variable expenses ratio, then the contribution margin will also increase by 19%
		West division
	Increase in contribution margin ( 290700 * 19% )	55233
	(-) Increase in advertising expense	25000
	Incremental net operating income	30233

Net operating income will

increase

by

30233

2B	Answer : Yes
	Increase in advertising expense is resulting in increase in net operating income