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 $ 1,645,000 Variable expenses 623,950 Contribution margin 1,021,050 Fixed expenses 1,123,000 Net operating income (loss) $ (101,950) 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 $ 445,000 $ 610,000 $ 590,000 Variable expenses as a percentage of sales 53 % 23 % 42 % Traceable fixed expenses $ 299,000 $ 327,000 $ 203,000 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 $21,000 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? 2-b. Would you recommend the increased advertising?

Answer 1

Windgate Company

1. Segmented Income Statement

Company East Central West

Sales $ 1,645,000 $445,000 $610,000 $590,000

Variable expenses 623,950 235,850 140,300 247,800

Contribution margin 1,021,050 209,150 469,700 342,200

Fixed expenses Traceable 759,000 229,000 327,000 203,000

Fixed expenses: Common 364,000

Net operating income (loss) $ (101,950) ($19,850) $142,700 $139,200

2-a. Division West:

Sales $660,800 (590,000 x 1.12)

Variable expenses 247,800

Contribution 413,000

Fixed Costs 224,000

Net operating income (loss) $ 189,000

Difference = $49,800 ($189,000 - 139,200)

The net operating income would increase by $49,800.

2-b. I would recommend the increased advertising. It brings in more profit than the costs.

Step-by-step explanation:

a) Data:

Income Statement

Sales $ 1,645,000

Variable expenses 623,950

Contribution margin 1,021,050

Fixed expenses 1,123,000

Net operating income (loss) $ (101,950)

b) Windgate Company's segmented income statement has enabled the tracing of fixed costs to the three divisions and the calculation of net operating income for the three divisions. Thus, revealing that Division East was not profitable. From this information, management can decide to make some changes or altogether dispose of Division East in order to redeem the fortunes of the company.