Question

Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:

Sales	$	1,687,000
Variable expenses		617,970
Contribution margin		1,069,030
Fixed expenses		1,176,000
Net operating loss	$	(106,970)

  

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

	Geographic Market
	South			Central			North
Sales	$	427,000		$	680,000		$	580,000
Variable expenses as a percentage of sales		51	%		29	%		35	%
Traceable fixed expenses	$	261,000		$	324,000		$	208,000

Required:

1.	Prepare a contribution format income statement segmented by geographic market, as desired by the president. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

		Geographic Market
	Total        Company	South	Central	North
(Click to select)Common fixed expenses not traceable to geographic marketsContribution marginVariable expensesNet operating income (loss)Geographic market segment marginTraceable fixed expensesSales	$	$	$	$
(Click to select)Geographic market segment marginCommon fixed expenses not traceable to geographic marketsSalesVariable expensesContribution marginNet operating income (loss)Traceable fixed expenses
(Click to select)Contribution marginGross margin
(Click to select)SalesCommon fixed expenses not traceable to geographic marketsVariable expensesNet operating income (loss)Traceable fixed expensesContribution marginGeographic market segment margin
(Click to select)Variable expensesGeographic market segment marginTraceable fixed expensesNet operating income (loss)SalesCommon fixed expenses not traceable to geographic marketsContribution margin		$	$	$
(Click to select)Variable expensesGeographic market segment marginTraceable fixed expensesNet operating income (loss)SalesCommon fixed expenses not traceable to geographic marketsContribution margin
(Click to select)Net operating lossNet operating income	$

2a.	The company’s sales manager believes that sales in the Central geographic market could be increased by 18% if monthly advertising were increased by $27,000. Calculate the incremental net operating income.

Incremental net operating income

$

2b.	Would you recommend the increased advertising?
	No Yes

Answer 1

Answer of Part 2:

Incremental Sales = Sales * Rate of incremental
Incremental Sales = $680,000 *18%
Incremental Sales = $122,400

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $482,800 / $680,000
Contribution Margin Ratio = 71%

Incremental Contribution Margin = Incremental Sales * Contribution Margin Ratio
Incremental Contribution Margin = $122,400 * 71%
Incremental Contribution Margin = $86,904

Incremental Operating Income = Incremental Contribution Margin = Incremental Advertising Expenses
Incremental Operating Income = $86,904 - $27,000
Incremental Operating Income =$59,904

Answer of Part 3:

Yes, I would recommend the increased advertising because there is an increase in operating income