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 $ 1,602,000 Variable expenses 555,380 Contribution margin 1,046,620 Fixed expenses 1,151,000 Net operating income (loss) $ (104,380) 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 $ 412,000 $ 670,000 $ 520,000 Variable expenses as a percentage of sales 44 % 31 % 32 % Traceable fixed expenses $ 290,000 $ 332,000 $ 191,000 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 12%. 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. A Contribution Format Income Statement for divisions:

2a. Increase monthly advertising for the West Division by $28,000 to increase its sales by 12%

East Central West Total

Sales $412,000 $670,000 $520,000 $1,602,000

Variable exp. 181,280 207,700 166,400 555,380

Contribution

margin $230,720 462,300 353,600 1,046,620

Fixed expenses 290,000 332,000 191,000 813,000

Non-Traceable

Fixed Expenses 338,000

Net operating Income

(loss) ($59,280) $130,300 $162,600 ($104,380)

2b. How much Company's Net Operating Income Increase (Decrease) with the implementation of the above Proposal:

Net operating income before advert = $162,600

Division's net operating income after advert = $160,366

Therefore, the company's net operating loss will increase by $2,234

Step-by-step explanation:

a) Wingate Company's recent monthly contribution format Income Statement:

Sales $ 1,602,000

Variable expenses 555,380

Contribution margin 1,046,620

Fixed expenses 1,151,000

Net operating income (loss) $ (104,380)

b) Division West's Income Statement:

Sales $582,400 ($520,000 x 1.12)

Variable expenses 203,034 ($181,280 x 1.12)

Contribution margin $379,366

Fixed Expenses 219,000 ($191,000 + 28,000)

Net Operating Income $160,366

c) If sales value increases by 12%, the variable expenses will increase proportionately, unless there is an increase in the price, which will ultimately reduce demand, further depressing the sales value. This is why it is called Variable Cost. Therefore, a different result will be obtainable if the variable expenses are held constant, contrary to its behavior.