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.

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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