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.

Question
Asked Apr 8, 2019
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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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Expert Answer

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

 SouthCentral NorthTotal
Sales607,000806,0006570002,070,000
Variable Expenses303500290160302220895,880
Contribution margin303,500515,840354,7801,174,120
Fixed expenses-traceable320,000480,000307,0001,107,000
Directly traceable profit/(loss)-16,50035,84047,78067,120
Fixed expenses-allocated621668254767287212,000
Total profit/loss-78,666-46,707-19,507-144,880
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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-advertisment32,000
Increase in net profit$19,584
...

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