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, which follows:

Sales	$	1,678,000
Variable expenses		648,560
Contribution margin		1,029,440
Fixed expenses		1,132,000
Net operating income (loss)	$	(102,560	)

In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

  

	Division
	East			Central			West
Sales	$	428,000		$	660,000		$	590,000
Variable expenses as a percentage of sales		52	%		27	%		42	%
Traceable fixed expenses	$	282,000		$	327,000		$	194,000

Required:

1. Prepare a contribution format income statement segmented by divisions, as desired by the president.

2-a. As a result of a marketing study, the president believes that sales in the West Division could be increased by 11% if monthly advertising in that division were increased by $25,000. Calculate the incremental net operating income.

2-b. Would you recommend the increased advertising?

	No
	Yes

Answer 1

1. Contribution format income statement segmented by divisions

		Divisions
	Total company	East	Central	West
Sales	$1,678,000	$428,000	$660,000	$590,000
Variable expense	$648,560	$222,560	$178,200	$247,800
Contribution margin	$648,560	$205,440	$481,800	$342,200
Traceable Fixed expense	$803,000	$282,000	$327,000	$194,000
Divisional segment margin	$226,440	($76,560)	$154,800	$148,200
Common fixed expense not traceable to divisions	$329,000
Net operating income (loss)	($102,560)

Common fixed expense not traceable to divisions= $1,132,000 - $803,000 =$329,000

2.a

Incremental west division sales (590,000×11%)	$64,900
Contribution margin ratio ($342,200/$590,000)	58%
Incremental contribution margin	$37,642
Less: Incremental advertising expense	($25,000)
Incremental net operating income	$12,642

2.b

Yes, the additional program should be initiated.

____×____

All the best