Question

Bovine Company, a wholesale distributor of umbrellas, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:

Sales	$	2,200,000
Variable expenses		872,500
Contribution margin		1,327,500
Fixed expenses		1,345,000
Operating loss	$	(17,500	)

In an effort to isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the Accounting Department has developed the following:

	Geographic Market
	South			Central			North
Sales	$	620,000		$	819,000		$	761,000
Variable expenses as a percentage of sales		52	%		30	%		40	%
Traceable fixed expenses	$	360,000		$	529,000		$	320,000

Required:
1. Prepare a contribution format income statement segmented by geographic market, as requested by the president.

2-a. The company’s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising is increased by $45,000. Calculate the incremental net operating income.

Answer 1