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:
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:
|Variable expenses as a percentage of sales||50||%||36||%||46||%|
|Traceable fixed expenses||$||320,000||$||480,000||$||307,000|
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.
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,
the geographical income statement for the company has been presented as below
|Directly traceable profit/(loss)||-16,500||35,840||47,780||67,120|
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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