Question

Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:

Sales $1,500,000 Variable expenses 588,000 Contribution margin 912,000 Fixed expenses 945,000 Net operating loss $ (33,000)
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 data:
Geographic Market South Central North Sales $400,000 $600,000 $500,000 Variable expenses as a percentage of sales 52% 30% 40% Traceable fixed expenses $240,000 $330,000 $200,000
Required: i. Prepare a contribution format income statement segmented by geographic market, as desired by the president. ii. The company’s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising were increased by $25,000. Would you recommend the increased advertising? Show computations to support your answer.

Answer 1

Particulars
`\text{Total company}`
`\text{South }`
`\text{Central}`
`\text{North}`

Sales $
`1,500,000` $
`400,000` $
`600,000` $
`500,000`

Variable expenses 588,000 208000 180000 200000

Contribution margin 912000 192000 420000 300000

Traceable fixed 770,000 240,000 330,000 200,000

expenses

Geographic market 142,000 -$48000 $90000 $100000

segment expenses

Common fixed

expenses not traceable

to geographic markets

Net operating income