Bovine Company, a wholesale distributor of umbrellas, has been experiencing loss
ID: 2574146 • Letter: B
Question
Bovine Company, a wholesale distributor of umbrellas, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:
Bovine Company, a wholesale distributor of umbrellas, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement Sales Variable expenses $2,080,000 878,020 Contribution margin Fixed expenses 1,201,980 1,321,000 Operating loss S (119,020) In an effort to isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the Accounting Department has developed the following Geographic Market South S608,000 $807,000 North $665,000 Central Sales 56% 3'2% 42% Variable expenses as a percentage of sales Traceable fixed expenses S328,000 $538,000 $308,000 Required 1. Prepare a contribution format income statement segmented by geographic market, as requested by the president Geographic Market Total Company South Central North ales riable expenses Contribution margin raceable fixed expenses Geographic market segment margin ommon fixed expenses not traceable to products Operating income 2-a. The company's sales manager believes that sales in the Central geographic market could be increased by 10% if monthly advertising is increased by $33,000. Calculate the incremental net operating income emental net operating income 2-b. Would you recommend the increased advertising? O Yes O NoExplanation / Answer
Computation of Variable Expenses
South
Central
North
Total
Sales
$ 608,000
$ 807,000
$ 665,000
$ 2,080,000
Variable Expenses as a % of Sales
56%
32%
42%
Variable Expenses
$ 340,480
$ 258,240
$ 279,300
$ 878,020
Computation of Common Fixed Expenses
South
Central
North
Total
Total Fixed Cost
$ 1,321,000
Less: Traceable Fixed Expenses
$ 328,000
$ 538,000
$ 308,000
$ 1,174,000
Common Fixed Cost
$ 147,000
Geographic Market
Total Company
South
Central
North
Sales
$ 2,080,000
$ 608,000
$ 807,000
$ 665,000
Variable Expenses
$ 878,020
$ 340,480
$ 258,240
$ 279,300
Contribution Margin
$ 1,201,980
$ 267,520
$ 548,760
$ 385,700
Traceable Fixed Expenses
$ 1,174,000
$ 328,000
$ 538,000
$ 308,000
Geographic market segment margin
$ 27,980
$ (60,480)
$ 10,760
$ 77,700
Common Fixed expenses
$ 147,000
operating Income
$ (119,020)
New Sales in Central
110% of Existing Sales
$807,000 x 110%
$ 887,700
Computation of Revised Variable Expenses
South
Central
North
Total
Sales
$ 608,000
$ 887,700
$ 665,000
$ 2,160,700
Variable Expenses as a % of Sales
56%
32%
42%
Variable Expenses
$ 340,480
$ 284,064
$ 279,300
$ 903,844
Central traceable Fixe Cost= $538,000+$33,000=$571,000
Revised Contribution format Income Statement
Geographic Market
Total Company
South
Central
North
Sales
$ 2,160,700
$ 608,000
$ 887,700
$ 665,000
Variable Expenses
$ 903,844
$ 340,480
$ 284,064
$ 279,300
Contribution Margin
$ 1,256,856
$ 267,520
$ 603,636
$ 385,700
Traceable Fixed Expenses
$ 1,207,000
$ 328,000
$ 571,000
$ 308,000
Geographic market segment margin
$ 49,856
$ (60,480)
$ 32,636
$ 77,700
Common Fixed expenses
$ 147,000
operating Income
$ (97,144)
2a)
Incremental net operating income =$119,020-$97,144=$21,876
2 b) Yes as there is incremental income
Computation of Variable Expenses
South
Central
North
Total
Sales
$ 608,000
$ 807,000
$ 665,000
$ 2,080,000
Variable Expenses as a % of Sales
56%
32%
42%
Variable Expenses
$ 340,480
$ 258,240
$ 279,300
$ 878,020
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