Question

Exercise 6-11 Segmented Income Statement [LO6-4]

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	$	1,637,000
Variable expenses		668,110
Contribution margin		968,890
Fixed expenses		1,066,000
Net operating income (loss)	$	(97,110)

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	$	437,000		$	610,000		$	590,000
Variable expenses as a percentage of sales		53	%		29	%		44	%
Traceable fixed expenses	$	273,000		$	326,000		$	207,000

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 $21,000 based on the belief that it would increase that division's sales by 17%. 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	1637000	437000	610000	590000
	Variable expenses	668110	231610	176900	259600
	Contribution margin	968890	205390	433100	330400
	Traceable fixed expenses	806000	273000	326000	207000
	Divisional segment margin	162890	(67610)	107100	123400
	Common fixed expenses not traceable to divisions [ 1066000 - 806000 ]	260000
	Net operating loss	(97110)

2A	If sales of West division is increased by 17% without any change in the variable expenses ratio, then the contribution margin will also increase by 17%
		West division
	Increase in contribution margin ( 330400 * 17% )	56168
	(-) Increase in advertising expense	21000
	Incremental net operating income	35168

Net operating income will

increase

by

35168

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