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 $ 1,627,000 Variable expenses 517,490 Contribution margin 1,109,510 Fixed expenses 1,220,000 Net operating income (loss) $ (110,490 ) 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: Division East Central West Sales $ 417,000 $ 670,000 $ 540,000 Variable expenses as a percentage of sales 47 % 23 % 31 % Traceable fixed expenses $ 267,000 $ 339,000 $ 199,000 Required: 1. 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 11% if monthly advertising in that division were increased by $24,000. Calculate the incremental net operating income.

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Answer #1

Solution 1:

Wingate Company
Segmanted Income Statement
Particulars East Central West Total
Sales $4,17,000 $6,70,000 $5,40,000 $16,27,000
Variable Expenses $1,95,990 $1,54,100 $1,67,400 $5,17,490
Contribution margin $2,21,010 $5,15,900 $3,72,600 $11,09,510
Less: Traceable Fixed Expenses $2,67,000 $3,39,000 $1,99,000 $8,05,000
Segment Margin -$45,990 $1,76,900 $1,73,600 $3,04,510
Less: Common fixed expenses (1,220,000-805,000) $4,15,000
Operating Profit -$1,10,490

Solution 2:

Increase in sales in West Division = $540000*11% = $59,400

Contribution margin ratio in West division = $372600/ $540000 = 69%

Incremental Contribution margin = Increase in sales *Contribution margin ratio = $59400*69% = $40,986

Incremental Net Operating Income = Incremental Contribution margin - Increase in Advertising expense

= $40986 - $24000 = $16,986

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