Wingate Company, a wholesale distributor of electronic equipment, has been exper
ID: 2396309 • Letter: W
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:
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
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 $23,000 based on the belief that it would increase that division's sales by 14%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?
The Marketing Department has proposed increasing the West Division's monthly advertising by $23,000 based on the belief that it would increase that division's sales by 14%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? (Do not round intermediate calculations.
2-b. Would you recommend the increased advertising?
Sales $ 1,575,000 Variable expenses 582,000 Contribution margin 993,000 Fixed expenses 1,092,000 Net operating income (loss) $ (99,000)Explanation / Answer
Particulars
Total Company
East Division
Central Division
West Division
Sales
1,575,000
365,000
670,000
540,000
Less : Variable expenses
582,000
182,500
194,300
205,200
Contribution margin
993,000
182,500
475,700
334,800
Less: Traceable fixed expenses
811,000
290,000
327,000
194,000
Divisional segment margin
182,000
(107,500)
148,700
140,800
Less: Common fixed expenses not traceable to divisions
281,000
Net Operating Income (Loss)
(99,000)
Working Notes :
Computation of variable expenses of Division East.
Variable expenses = Sales of Division East x Variable expenses percentage
= $365,000 x 50%
= $182,500
Computation of variable expenses of Division Central.
Variable expenses = Sales of Division Central x Variable expenses percentage
= $670,000 x 29%
= $194,300
Computation of variable expenses of Division West.
Variable expenses = Sales of Division West x Variable expenses percentage
= $540,000 x 38%
= $205,200
Computation of total traceable fixed expenses.
Total traceable fixed expenses = Traceable fixed expenses of Division East + Traceable fixed expenses of Division Central + Traceable fixed expenses of Division West
= 290,000 + 327,000 + 194,000
= $ 811,000
Computation of common fixed expenses not traceable to company.
Common fixed expenses not traceable to company = Total fixed expenses of company – Total traceable fixed expenses
= 1,092,000 – 811,000
= $281,000
2-a. Incremental Sales ($540,000 x 14%) $75,600
Contribution margin ratio
(334,800 /540,000) x 62%
Incremental contribution margin $46,872
Less : Incremental Advertising Expenses $23,000
Incremental net operating income $23,872
2-b. Yes, the advertising program should be initiated.
Particulars
Total Company
East Division
Central Division
West Division
Sales
1,575,000
365,000
670,000
540,000
Less : Variable expenses
582,000
182,500
194,300
205,200
Contribution margin
993,000
182,500
475,700
334,800
Less: Traceable fixed expenses
811,000
290,000
327,000
194,000
Divisional segment margin
182,000
(107,500)
148,700
140,800
Less: Common fixed expenses not traceable to divisions
281,000
Net Operating Income (Loss)
(99,000)
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