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 margin Fixed expenses Net operating income (loss) $ 1,593,000 530,160 1,062,840 1,169,000 $ (106,160) 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: Sales Variable expenses as a percentage of sales Traceable fixed expenses East $373,000 528 $292,000 Division Central $700,000 25% $329,000 West $520,000 31% $202,000 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 $26,000 based on the belief that it would increase that division's sales by 17%. 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

(1).

Division

Total company

East

Central

West

Sales

$1593000

$373000

$700000

$520000

Variable expenses

($530160)

($193960)

($175000)

($161200)

Contribution margin

$1062840

$179040

$525000

$358800

Traceable fixed expenses

($823000)

($292000)

($329000)

($202000)

Divisional segment margin

$239840

($112960)

$196000

$156800

Common fixed expenses not traceable

($346000)

-------

-------

-------

Net operating loss

($106160)

(2-a).

Net operating income will increase by $34996

Explanation;

Let’s calculate incremenatl revenue of West Division to know the impact on net operating income;

West Division

Incremental revenue ($520000 * 17%)

$88400

Less: Variable expenses ($88400 * 31%)

($27404)

Incremental contribution margin

$60996

Less: Additional advertising expenses

($26000)

Incremental net operating income

$34996

(2-b).

Answer is (Yes)

Yes we would recommend the increased advertising because it will lead to additional net operating income of $34996.

Division

Total company

East

Central

West

Sales

$1593000

$373000

$700000

$520000

Variable expenses

($530160)

($193960)

($175000)

($161200)

Contribution margin

$1062840

$179040

$525000

$358800

Traceable fixed expenses

($823000)

($292000)

($329000)

($202000)

Divisional segment margin

$239840

($112960)

$196000

$156800

Common fixed expenses not traceable

($346000)

-------

-------

-------

Net operating loss

($106160)

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