Wingate Company a wholesale distributor of electronic equipm

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 Variable expenses Contribution marain Fixed expenses Net operating income (loss) $1,550,000 491,700 1,058,300 1,164,000 (105,700) 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 Central $390,000 $640,000 $520,000 East West Sales Variable expenses as a percentage of sales Traceable fixed expenses 47% 23% 31% $262,000 $330,000 $201,000 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?

Solution

Required 1

183300

(390000*47%)

147200

(640000*23%)

161200

(520000*31%)

371000

(1164000-793000)

Required 2 A

Net operating income will increase by 22056

Explanation :

Incremental sales (520000*12%) = 62400

Contribution margin ratio (358800/520000) = 69%

Incremental contribution margin (62400*69%) =43056

Incremental fixed expenses =21000

Incremental net operating income (43056-21000) = 22056

Required 2 B

Yes

The advertising program should be initiated because it leads to increase in net operating income.

	Total company	east	central	west
Sales	1550000	390000	640000	520000
Variable expenses	491700	183300 (390000*47%)	147200 (640000*23%)	161200 (520000*31%)
Contribution margin	1058300	206700	492800	358800
Traceable fixed expenses	793000	262000	330000	201000
Divisional segment margin	265300	(55300)	162800	157800
Common fixed expenses not Traceable to divisions	371000 (1164000-793000)
Net operating loss	(105700)