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, which follows:

  

Sales	$	1,598,000
Variable expenses		616,640
Contribution margin		981,360
Fixed expenses		1,079,000
Net operating income (loss)	$	(97,640)

  

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		$	670,000		$	500,000
Variable expenses as a percentage of sales		48	%		36	%		34	%
Traceable fixed expenses	$	298,000		$	332,000		$	208,000

  

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 18% if monthly advertising in that division were increased by $29,000. Calculate the incremental net operating income.

      

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

Answer 1

• All working form part of the answer
• Requirement 1

	East	Central	West	TOTAL
Sales	$                                 428,000.00	$                670,000.00	$                                   500,000.00	$   1,598,000.00
Variable expenses	$                                 205,440.00	$                241,200.00	$                                   170,000.00	$       616,640.00
Contribution margin	$                                 222,560.00	$                428,800.00	$                                   330,000.00	$       981,360.00
Traceable fixed expenses	$                                 298,000.00	$                332,000.00	$                                   208,000.00	$       838,000.00
Segment Margin	$                                 (75,440.00)	$                  96,800.00	$                                   122,000.00	$       143,360.00
Common Fixed expenses				$       241,000.00
Net Operating Income (Loss)				$       (97,640.00)

• Requirement 2 ‘a’

	East	Central	West	TOTAL
Sales	$                                 428,000.00	$                670,000.00	$                                   590,000.00	$   1,688,000.00
Variable expenses	$                                 205,440.00	$                241,200.00	$                                   200,600.00	$       647,240.00
Contribution margin	$                                 222,560.00	$                428,800.00	$                                   389,400.00	$   1,040,760.00
Traceable fixed expenses	$                                 298,000.00	$                332,000.00	$                                   237,000.00	$       867,000.00
Segment Margin	$                                 (75,440.00)	$                  96,800.00	$                                   152,400.00	$       173,760.00
Common Fixed expenses				$       241,000.00
Net Operating Income (Loss)				$       (67,240.00)
Earlier Net Operating Income (Loss)				$       (97,640.00)
Incremental Net Operating Income				$         30,400.00

• Requirement 2 ‘b’

YES, the increased advertising is RECOMMEDNED because the Incremental Net Operating Income is POSITIVE as Net Operating Loss is reducing by $ 30,400.