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 $ 1,535,000 Variable expenses 553,150 Contribution margin 981,850 Fixed expenses 1,080,000 Net operating income (loss) $ (98,150) 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 $ 355,000 $ 660,000 $ 520,000 Variable expenses as a percentage of sales 53 % 23 % 41 % Traceable fixed expenses $ 296,000 $ 331,000 $ 202,000 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 $28,000 based on the belief that it would increase that division's sales by 16%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented

Answer 1

Wingate Company

1. Contribution Format Income Statement (segmented by divisions):

East Central West Total

Sales $ 355,000 $ 660,000 $ 520,000 $ 1,535,000

Variable Expenses 188,150 151,800 213,200 553,150

Contribution 166,850 508,200 306,800 981,850

Traceable Fixed Exp. 296,000 331,000 202,000 829,000

Non-Traceable Fixed Expenses 251,000

Net operating income/

(Loss) (129,150) 177,200 104,800 (98,150)

2a) Increasing the West Division's monthly advertising by $28,000 based on the belief that it would increase that division's sales by 16%:

East Central West Total

Sales $ 355,000 $ 660,000 $ 603,200 $ 1,618,200

Variable Expenses 188,150 151,800 213,200 553,150

Contribution 166,850 508,200 390,000 1,065,050

Traceable Fixed Exp. 296,000 331,000 230,000 857,000

Non-Traceable Fixed Expenses 251,000

Net operating income/

(Loss) (129,150) 177,200 160,000 (42,950)

2b) The net operating income will increase by $55,200, thus reducing the loss from $98,150 to $42,950.

Step-by-step explanation:

Segmenting the income statement into divisions helps management to trace the loss making division as Division East. The division has a traceable fixed cost that is far above its contribution to profit. The fixed expense must be studied, otherwise the division may be up for closure.