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 $21,000 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 $ 1,619,000 Variable expenses 514,150 Contribution margin 1,104,850 Fixed expenses 1,215,000 Net operating income (loss) $ (110,150)

Explanation / Answer

Total East Central West Sales 1619000 379000 680000 560000 Variable expenses 514150 170550 170000 173600 Contribution margin 1104850 208450 510000 386400 Traceable fixed expenses 820000 276000 334000 210000 Divisional segment margin 284850 -67550 176000 176400 Common fxed expenses not traceable to divisions 395000 Net operating loss -110150 2 Incremental sales 100800 =560000*18% Contribution margin ratio 69% Incremental contribution margin 69552 Less incremental advertising expense 21000 Incremental net operating income 48552 b Yes, the advertising program should be initiated.

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