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	$	1,676,000
Variable expenses		553,600
Contribution margin		1,122,400
Fixed expenses		1,235,000
Net operating income (loss)	$	(112,600)

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	$	416,000		$	700,000		$	560,000
Variable expenses as a percentage of sales		55	%		20	%		33	%
Traceable fixed expenses	$	278,000		$	339,000		$	199,000

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 10%. 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. Preparation of contribution format income statement segmented by division -

			East	Central	West		Total
	A	Sales	416000	700000	560000		1676000
		variable expenses as a percentage of sales	55%	20%	33%
less	B	variable expenses	228800	140000	184800		553600
	C	Contribution (A-B)	187200	560000	375200		1122400
less	D	Traceable fixed expenses	278000	339000	199000		816000
	E	Margin after traceable fixed expenses (C-D)	-90800	221000	176200		306400
less	F	Common fixed expenses (1235000-816000)					419000
		Net operating income/-loss (E-F)					-112600

2. (a) Calculation of the company's net operating inocme increase (decrease) if the proposal is implemented -

			East	Central	West		Total
	A	Sales (Ealier sales of west *1.10)	416000	700000	616000		1732000
		variable expenses as a percentage of sales	55%	20%	33%
less	B	variable expenses	228800	140000	203280		572080
	C	Contribution (A-B)	187200	560000	412720		1159920
less	D	Traceable fixed expenses + advertising expense of west	278000	339000	222000		839000
	E	Margin after traceable fixed expenses (C-D)	-90800	221000	190720		320920
less	F	Common fixed expenses as earlier					419000
		Net operating income/-loss (E-F)					-98080

net operating income has increase by $ 14520 (112600 - 98080)

2. (b) Yes, I would recommend as Net operating income has been increased in 2 (a) by $ 14520.

Please check with your answer and let me know.