Question

. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $28,000 based on the belief that it would increase that division's sales by 19%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented

Answer 1

1. ($98,560)

2a. Increase by $36,790

2b. Yes

Step-by-step explanation:

1. Preparation of a contribution format income statement segmented by divisions

CONTRIBUTION FORMAT INCOME STATEMENT

East + Central + West= Total Company

Sales

$351,000 +$650,000+$550,000=$1,551,000

Less Variable expenses $196,560+$156,000+$209,000=$561,560

(56%*$351,000=$196,560)

(24%*$650,000=$156,000)

(38%*$550,000=$209,000)

Contribution margin

$154,440+$494,000+$341,000=$989,440

Traceable fixed expenses $258,000+$331,000+ $205,000=$794,000

Divisional segment margin-$103,560+$163,000 +$136,000=$195,440

($154,440-$258,000=-$103,560)

($494,000-$331,000=$163,000)

($341,000-$205,000=$136,000)

Common fixed expenses not traceable to divisions $294,000

($1,088,000-$794,000)

Net operating loss ($98,560)

($195,440-$294,000)

2a. Calculation for how much would the company's net operating income increase (decrease) if the proposal is implemented

Incremental West Division sales $104,500 ($550,000*19%)

X Contribution margin ratio 62%

(1-38%)

=Incremental contribution margin $64,790

($194,500*62%)

Less incremental advertising expense $28,000

Net operating income will increase by $36,790

($64,790-$28,000)

2b. YES, I Would recommend the increased advertising.