Problem:
Wingate Company, a wholesale distributor of videotapes, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement, which follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . 390,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . 610,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 625,000
Net operating income (loss) . . . . . . . . . . . . . . . . . $ (15,000)
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 . . . . . . . . . . . . . . $250,000 $400,000 $350,000
Variable expenses as a percentage of sales 52% 30% 40%
Traceable fixed expenses . . . . $160,000 $200,000 $175,000
Question 1. Prepare a contribution format income statement segmented by divisions, as desired by the president.
Question 2. As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Would you recommend the increased advertising? Show computations to support your answer.