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

Answer:

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.

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)