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:

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	$	1,646,000
Variable expenses		557,580
Contribution margin		1,088,420
Fixed expenses		1,197,000
Net operating income (loss)	$	(108,580)

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
	East			Central			West
Sales	$	396,000		$	650,000		$	600,000
Variable expenses as a percentage of sales		48	%		27	%		32	%
Traceable fixed expenses	$	279,000		$	323,000		$	202,000

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 18%. 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?

Explanation

1.

Common fixed expenses not traceable to divisions = $1,197,000 – $804,000 = $393,000.

2.

a.

Incremental West Division sales ($600,000 × 18%)	$	108,000
Contribution margin ratio ($408,000 ÷ $600,000)	×	68	%
Incremental contribution margin	$	73,440
Less incremental advertising expense		21,000
Incremental net operating income	$	52,440

2.

b.

Yes, the advertising program should be initiated.

Thanks