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:

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 $27,000 based on the belief that it would increase that division's sales by 18%. 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?

Sales $ 1,620,000 Variable expenses 611,700 Contribution margin 1,008,300 Fixed expenses 1,109,000 Net operating income (loss) $ (100,700)

Explanation / Answer

1.

Contribution format Income Statement

2.

Contribution format Income Statement

* Common fixed expenses = 1,109,000 - 255,000 - 325,000 - 194,000 = 335,000

2-b.

The increased avderstising is recommended as it increases the West division profits by 33,534 (175,834 - 142,300) and reduce company losses by 33,534 (100,700 - 67,166)

East Division Central Division West Division Sales 450,000 600,000 570,000 Variable expenses 234,000 (450,000*52%) 144,000 (600,000*24%) 233,700 (570,000*41%) Contribution margin 216,000 456,000 336,300 Fixed expenses 255,000 325,000 194,000 Net operating income (39,000) 131,000 142,300

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