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.

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