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, which follows:Sales $1,584,000Variable expenses $610,020Contribution margin $973,980Fixed expenses $1.071,000Net operating income (loss) $(97,020)In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:East DivisionSales $434,000Variable expenses as a percentage of sales 53%Traceable fixed expenses $261,000Central DivisionSales $650,000Variable expenses as a percentage of sales 20%Traceable fixed expenses $357,000West DivisionSales $500,000Variable expenses as a percentage of sales 50%Traceable fixed expenses $204,0001. Prepare a contribution format income statement segmented by divisions, as desired by the president.2-a. As a result of a marketing study, the president believes that sales in the West Division could be increased by 14% if monthly advertising in that division were increased by $29,000. Calculate the incremental net operating income.2-b. Would you recommend the increased advertising?

Answer 1

Required 1.

Contribution format income statement

East Central West

Division Sales $434,000 $650,000 $500,000

Less Variable Expenses ($230,020) ($130,000) ($250,000)

Controllable Contribution $203,980 $520,000 $250,000

Less Controllable Fixed Costs :

Traceable fixed expenses ($261,000) ($357,000) ($204,000)

Controllable Profit/(Loss) ($57,020) $163,000 $46,000

Required 2.

2a. Calculation of Incremental Net Income - West Division

Incremental Sales ($500,000 × 14%) $70,000

Less Incremental Variable Expenses ($29,000)

Incremental Contribution $41,000

Less Incremental Fixed Expenses $0

Incremental Net Income/ (loss) $41,000

2b. Recommendation

Yes. The Increase in advertising is bringing a positive contribution towards the Company`s loss.

Step-by-step explanation:

The Company`s loss will reduce by $41,000 to ($56,020) due to increase in advertising.