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	$	1,552,000
Variable expenses		587,860
Contribution margin		964,140
Fixed expenses		1,061,000
Net operating income (loss)	$	(96,860)

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	$	362,000		$	660,000		$	530,000
Variable expenses as a percentage of sales		48	%		25	%		47	%
Traceable fixed expenses	$	250,000		$	331,000		$	203,000

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 $26,000 based on the belief that it would increase that division's sales by 13%. 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

• Requirement 1

	Total	East	Central	West
Sales	$1,552,000	$362,000	$660,000	$530,000
Variable expenses	$587,860	$173,760	$165,000	$249,100
Contribution margin	$964,140	$188,240	$495,000	$280,900
Traceable Fixed expenses	$784,000	$250,000	$331,000	$203,000
Segment/Division margin	$180,140	($61,760)	$164,000	$77,900
Common Fixed expenses	$277,000
Net Operating Income (Loss)	($96,860)

• Requirement 2 ‘a’

--Working

	Total	East	Central	West
Sales	$1,620,900	$362,000	$660,000	$598,900 [530000 + 13%]
Variable expenses	$620,243	$173,760	$165,000	$281,483 [47% of sale]
Contribution margin	$1,000,657	$188,240	$495,000	$317,417
Traceable Fixed expenses	$810,000	$250,000	$331,000	$229,000 [203000 + 26000]
Segment/Division margin	$190,657	($61,760)	$164,000	$88,417
Common Fixed expenses	$277,000
Net Operating Income (Loss)	($86,343)

--Answer

A	Net Loss before	$96,860
B	Net Loss now	$86,343
C = A - B	Net Income increased by	$10,517

• Requirement 2 ‘b’

YES, increasing the advertising expense is recommended because increase in contribution margin is MORE than increase in Fixed cost of advertising.