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$1,645,000 Variable expenses 623,950 Contribution margin 1,021,050 Fixed expenses 1,123,000 Net operating income (loss)$(101,950) 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 EastCentralWest Sales$445,000 $610,000 $590,000 Variable expenses as a percentage of sales 53% 23% 42% Traceable fixed expenses$299,000 $327,000 $203,000 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 12%. 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?

Windgate Company

1. Segmented Income Statement

                                              Company         East          Central        West

Sales                                    $ 1,645,000  $445,000  $610,000 $590,000

Variable expenses                   623,950    235,850     140,300    247,800

Contribution margin               1,021,050     209,150    469,700    342,200

Fixed expenses  Traceable     759,000    229,000    327,000    203,000

Fixed expenses: Common      364,000

Net operating income (loss) $ (101,950)   ($19,850)  $142,700  $139,200

2-a. Division West:

Sales                                        $660,800 (590,000 x 1.12)

Variable expenses                    247,800

Contribution                               413,000

Fixed Costs                               224,000

Net operating income (loss)  $ 189,000

Difference = $49,800 ($189,000 - 139,200)

The net operating income would increase by $49,800.

2-b. I would recommend the increased advertising.  It brings in more profit than the costs.

Explanation:

a) Data:

Income Statement

Sales                                    $ 1,645,000

Variable expenses                   623,950

Contribution margin               1,021,050

Fixed expenses                      1,123,000

Net operating income (loss) $ (101,950)

b) Windgate Company's segmented income statement has enabled the tracing of fixed costs to the three divisions and the calculation of net operating income for the three divisions.  Thus, revealing that Division East was not profitable.  From this information, management can decide to make some changes or altogether dispose of Division East in order to redeem the fortunes of the company.

decentralization can the employees to get more involved in the business decision making