# 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\$2,070,000   Variable expenses 895,880        Contribution margin 1,174,120   Fixed expenses 1,319,000        Operating loss\$(144,880)       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   SouthCentralNorth  Sales\$607,000 \$806,000 \$657,000   Variable expenses as a percentage of sales 50% 36% 46%  Traceable fixed expenses\$320,000 \$480,000 \$307,000  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 10% if monthly advertising is increased by \$32,000. Calculate the incremental net operating income.

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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 \$ 2,070,000 Variable expenses 895,880 Contribution margin 1,174,120 Fixed expenses 1,319,000 Operating loss \$ (144,880 )

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 \$ 607,000 \$ 806,000 \$ 657,000 Variable expenses as a percentage of sales 50 % 36 % 46 % Traceable fixed expenses \$ 320,000 \$ 480,000 \$ 307,000

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 10% if monthly advertising is increased by \$32,000. Calculate the incremental net operating income.

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Step 1

1. Working Notes:

1The total traceable fixed expenses for each region =\$1,107,000 where as the company has incurrred total fixed expenses of \$1,174,120.

So, we need to allocated \$1,319,000-\$ 1,107,000 = \$212,000 between the given three regions

In the absence of other information, we have assumed, it is allocated based on revenue of each region.

2. Thus, the fixed expenses  would be as follows,

South- \$212,000/2070,000*607,000=62,166

Central-212,000/2070,000*806,000= \$82,547

North-212,000/2070,000*657,000=\$67,287

the geographical income statement for the company has been presented as below

 South Central North Total Sales 607,000 806,000 657000 2,070,000 Variable Expenses 303500 290160 302220 895,880 Contribution margin 303,500 515,840 354,780 1,174,120 Fixed expenses-traceable 320,000 480,000 307,000 1,107,000 Directly traceable profit/(loss) -16,500 35,840 47,780 67,120 Fixed expenses-allocated 62166 82547 67287 212,000 Total profit/loss -78,666 -46,707 -19,507 -144,880
Step 2

2a. When Sales increases by 10% in Central due to increase in advertisement cost

 Increase in sales 10%*806000 \$80,600 Increase in Variable Cost (36%*80,600) \$29,016 Increase in Contribution \$51,584 Less. Increased fixed cost-advertisment 32,000 Increase in net profit \$19,584
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