Wingate Company, a wholesale distributor of electronic equipment, has been exper

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 Variable expenses Contribution marain Fixed expenses Net operating income (loss) $1,550,000 491,700 1,058,300 1,164,000 (105,700) 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 Central $390,000 $640,000 $520,000 East West Sales Variable expenses as a percentage of sales Traceable fixed expenses 47% 23% 31% $262,000 $330,000 $201,000 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 $21,000 based on the belief that it would increase that division's sales by 12%. 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?

Explanation / Answer

Required 1

183300

(390000*47%)

147200

(640000*23%)

161200

(520000*31%)

371000

(1164000-793000)

Required 2 A

Net operating income will increase by 22056

Explanation :

Incremental sales (520000*12%) = 62400

Contribution margin ratio (358800/520000) = 69%

Incremental contribution margin (62400*69%) =43056

Incremental fixed expenses =21000

Incremental net operating income (43056-21000) = 22056

Required 2 B

Yes

The advertising program should be initiated because it leads to increase in net operating income.

Total company east central west Sales 1550000 390000 640000 520000 Variable expenses 491700

183300

(390000*47%)

147200

(640000*23%)

161200

(520000*31%)

Contribution margin 1058300 206700 492800 358800 Traceable fixed expenses 793000 262000 330000 201000 Divisional segment margin 265300 (55300) 162800 157800 Common fixed expenses not Traceable to divisions

371000

(1164000-793000)

Net operating loss (105700)

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