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	$	1,620,000
Variable expenses		611,700
Contribution margin		1,008,300
Fixed expenses		1,109,000
Net operating income (loss)	$	(100,700)

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	$	450,000		$	600,000		$	570,000
Variable expenses as a percentage of sales		52	%		24	%		41	%
Traceable fixed expenses	$	255,000		$	325,000		$	194,000

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 $27,000 based on the belief that it would increase that division's sales by 18%. 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

	East Division	Central Division	West Division
Sales	450,000	600,000	570,000
Variable expenses	234,000 (450,000*52%)	144,000 (600,000*24%)	233,700 (570,000*41%)
Contribution margin	216,000	456,000	336,300
Fixed expenses	255,000	325,000	194,000
Net operating income	(39,000)	131,000	142,300

2.

Contribution format Income Statement

	East Division	Central Division	West Division	Company
Sales	450,000	600,000	672,600 [570,000+(570,000*18%)]	1,722,600
Variable expenses	234,000 (450,000*52%)	144,000 (600,000*24%)	275,766 (672,600*41%)	653,766
Contribution margin	216,000	456,000	396,834	1,068,834
Fixed expenses	255,000	325,000	221,000 (194,000+27,000)	801,000
Common fixed expenses				335,000
Net operating income	(39,000)	131,000	175,834	(67,166)

* Common fixed expenses = 1,109,000 - 255,000 - 325,000 - 194,000 = 335,000

2-b.

The increased avderstising is recommended as it increases the West division profits by 33,534 (175,834 - 142,300) and reduce company losses by 33,534 (100,700 - 67,166)