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 $1,674,000
Variable expenses 588,000
Contribution margin 1,086,000
Fixed expenses 1,195,000
Net operating income (loss) $(109,000)

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 $384,000 $690,000 $600,000
Variable expenses as a percentage of sales 45% 28% 37%
Traceable fixed expenses $270,000 $326,000 $204,000

Required:
a. Prepare a contribution format income statement segmented by divisions, as desired by the president.
b. As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Would you recommend the increased advertising?Required:

Answer 1

Wingate Company

a. Contribution format income statement segmented by divisions:

Division East Central West Total

Sales $384,000 $690,000 $600,000 $1,674,000

Variable expenses $172,800 $193,200 $222,000 588,000

Contribution margin $211,200 $496,800 $378,000 $1,086,000

Traceable fixed expenses 270,000 326,000 204,000 800,000

Non-traceable fixed expenses 395,000

Net operating income (loss) ($58,800) $170,800 $174,000 ($109,000)

b. Yes. I would recommend the increased advertising. The net operating loss reduces from $109,000 to $48,400.

Step-by-step explanation:

a) Data and Calculations:

Wingate

Most recent monthly contribution format income statement:

Sales $1,674,000

Variable expenses 588,000

Contribution margin 1,086,000

Fixed expenses 1,195,000

Net operating income (loss) $(109,000)

Division East Central West

Sales $384,000 $690,000 $600,000

Variable expenses as a percentage of sales 45% 28% 37%

Traceable fixed expenses $270,000 $326,000 $204,000

b) Increase of sales by 20% and advertising by $15,000:

Division East Central West Total

Sales $384,000 $690,000 $720,000 $1,794,000

Variable expenses $172,800 $193,200 $266,400 632,400

Contribution margin $211,200 $496,800 $453,600 $1,161,600

Traceable fixed expenses 270,000 326,000 219,000 815,000

Non-traceable fixed expenses 395,000

Net operating income (loss) ($58,800) $170,800 $234,600 ($48,400)