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	$	1,575,000
Variable expenses		582,000
Contribution margin		993,000
Fixed expenses		1,092,000
Net operating income (loss)	$	(99,000)

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	$	365,000		$	670,000		$	540,000
Variable expenses as a percentage of sales		50	%		29	%		38	%
Traceable fixed expenses	$	290,000		$	327,000		$	194,000

Required:

1. Prepare a contribution format income statement segmented by divisions.

	Division Total Company East Central West

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 14%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?

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 14%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? (Do not round intermediate calculations.

	Net operating income will. by

2-b. Would you recommend the increased advertising?

Answer 1

Particulars	Total Company	East Division	Central Division	West Division
Sales	1,575,000	365,000	670,000	540,000
Less : Variable expenses	582,000	182,500	194,300	205,200
Contribution margin	993,000	182,500	475,700	334,800
Less: Traceable fixed expenses	811,000	290,000	327,000	194,000
Divisional segment margin	182,000	(107,500)	148,700	140,800
Less: Common fixed expenses not traceable to divisions	281,000
Net Operating Income (Loss)	(99,000)

Working Notes :

Computation of variable expenses of Division East.

Variable expenses = Sales of Division East x Variable expenses percentage

                              = $365,000 x 50%

                              = $182,500

Computation of variable expenses of Division Central.

Variable expenses = Sales of Division Central x Variable expenses percentage

                              = $670,000 x 29%

                              = $194,300

Computation of variable expenses of Division West.

Variable expenses = Sales of Division West x Variable expenses percentage

                              = $540,000 x 38%

                              = $205,200

Computation of total traceable fixed expenses.

Total traceable fixed expenses = Traceable fixed expenses of Division East + Traceable fixed expenses of Division Central + Traceable fixed expenses of Division West

                                    = 290,000 + 327,000 + 194,000

                                    = $ 811,000

Computation of common fixed expenses not traceable to company.

Common fixed expenses not traceable to company = Total fixed expenses of company – Total traceable fixed expenses

                                       = 1,092,000 – 811,000

                                       = $281,000

2-a. Incremental Sales ($540,000 x 14%)                        $75,600

        Contribution margin ratio

         (334,800 /540,000)                                                  x 62%

        Incremental contribution margin                               $46,872

        Less : Incremental Advertising Expenses                $23,000

        Incremental net operating income                            $23,872

2-b. Yes, the advertising program should be initiated.