Problem 1

A recent monthly contribution margin income statement for Nortech Inc. is given below:

Sales $ 1,400,000

Variable costs 618,000

Contribution margin 782,000

Fixed costs 800,000

Net income $ (18,000)

In an effort to isolate the problem, the CEO has asked for information segmented by territory:

East Central West

Sales $ 350,000 $ 650,000 $ 400,000

Variable costs as a % of sales 52% 40% 44%

Direct fixed costs $ 195,000 $ 300,000 $ 180,000

Prepare a contribution margin income statement segmented by territory as requested by the CEO.

Based on a, do you recommend dropping any of the territories? If so, what impact would this have on the firms net income?

As a result of a marketing study, the CEO believes that sales in the West could be increased by 20% if monthly advertising in that territory was increased by $ 33,000. Would you recommend this action? Explain.