Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:
Variable expenses $623,730
Contribution margin $1,007,270
Fixed expenses $1,108,000
Net operating loss $(100,730)
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 data:
South Central North
Sales $431,000 $640,000 $560,000
Variable expenses as a percentage of sales 43% 30% 44%
Traceable fixed expenses $265,000 $334,000 $205,000
1. Prepare a contribution format income statement segmented by geographic market, as desired by the president.
2-a The company’s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising were increased by $26,000. Calculate the incremental net operating income.
2-b. Would you recommend the increased advertising?