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

Question

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing looses for some time, as shown by its most recent monthly contribution format income statement, which follows: 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: Prepare a contribution format income statement segmented by divisions, as desired by the president. As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15, 000. Calculate the incremental net operating income.

Explanation / Answer

Part 2-a)

We will evaluate the impact of increase in sales as a result of increase in advertising cost on the total income of the company. The impact is shown with the use of following table:

Incremental Operating Income Statement:

The incremental net operating income would be $27,000 if advertising is increased By $15,000.

Incremental Sales (350,000*20%) 70,000 Less Variable Expenses (70,000*40%) 28,000 Incremental Contribution 42,000 Less Incremental Advertising Expense 15,000 Incremental Net Operating Income $27,000

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