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 $ 1,000,000 Variable expenses 390,000 Contribution margin 610,000 Fixed expenses 625,000 Net operating income (loss) $ (15,000 ) 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 East Central West Sales $ 250,000 $ 400,000 $ 350,000 Variable expenses as a percentage of sales 52 % 30 % 40 % Traceable fixed expenses $ 160,000 $ 200,000 $ 175,000 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 $15,000 based on the belief that it would increase that division's sales by 20%. 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?

Answer 1

Answer: (1) Divisional segmented margin East ($40,000) Central $80,000, West $35,000 (2) incremental profit $27,000 (b ) I would recommend the increased advertising because it would increase profit by $27,000

Explanation:

East. Central. West. Total

Sales 250,000. 400,000. 350,000. 1,000,000

Less:variable

Expenses 130,000. 120,000. 140,000. 390,000

---------------- ------------------ ------------------- -------------------

Contribution

Margin. 120,000. 280,000. 210,000. 610,000

Traceable fixed

Expenses. 160,000. 200,000. 175,000. 535,000

Divisional

Segmented margin (40,000) 80,000. 35,000. 75,000

Common fixed

Expenses not traceable to

Division. - - - 90,000

Net operating income (loss) - - - (15,000)

Working of common fixed expenses not traceable to division

Fixed Expenses - Total traceable fixed expenses

625,000 - 535,000 = 90,000

(2)

Incremental contribution (0.2 × 210,000) 42,000

Less : Fixed cost. 15,000

-----------------

Incremental profit. 27,000

-------------------

(b) I would recommend the increased advertising because it would increase profit by $27,000

Answer 2

Answer:

$\left[\begin{array}{ccccc}&East&Central&West&Total\\Sales&250000&400000&350000&1000000\\Variable Cost&-130000&-120000&-140000&-390000\\Contribution&120000&280000&210000&610000\\Tracable fixed&-160000&-200000&-175000&-535000\\Operating Income&-40000&80000&35000&75000\\Common&&&&-90000\\Net Income&&&&-15000\\\end{array}\right]$

Income Smatement will increase by 27,000

Therefore to 13,000 net income from 15,000 net loss.

I would recommended.

Explanation:

We will calcualte the contribution per division and the opèrating income at division level. Then, we apply the common fixed cost and get the net income.

Increase of West division sales by 20%

350,000 x 20% = 70,000

70,000 x ( 1-40%) = 42,000 increase in contribution

less 15,000 adertizing cost: 27,000