Williams plans to open a third department in January 2016 that will sell paintin
ID: 2481892 • Letter: W
Question
Williams plans to open a third department in January 2016 that will sell paintings. Management predicts that the new department will generate $52,000 in sales with a 75% gross profit margin and will require the following direct expenses: sales salaries, $9,000; advertising, $800; store supplies, $800; and equipment depreciation, $900. It will fit the new department into the current rented space by taking some square foot- age from the other two departments. When opened the new painting department will fill one-fifth of the space presently used by the clock department and one-fourth used by the mirror department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the painting department to increase total office department expenses by $8,200. Since the painting department will bring new customers into the store, management expects sales in both the clock and mirror departments to increase by 12%. No changes for those departments' gross profit percents or their direct expenses are expected except for store supplies used, which will increase in proportion to sales.Explanation / Answer
Answer:
Calculation of COGS for Painting department:
Gross profit margin = (Sales - COGS)/Sales
0.75 = (52000 - COGS) / 52000
0.75*52000 = 52000 - COGS
COGS = 52000 - 39000 = 13000
Calculation of New COGS for Clock department:
Gross profit margin = 122400/240000 = 51%
Gross profit margin = (Sales - COGS)/Sales
0.51 = [(240000*1.12) - COGS] / (240000*1.12)
0.51*268800 = 268800 - COGS
COGS = 268800 - 137088 = 131712
Similarly, COGS will be calculated for Mirror department.
Calculation of new office expenses For each department:
Office expense =( Departmental sale/Combined sales)* Combined office expenses
Calculation of utilities expense of each department:
Rent expense = (Departmental rent expense/Combined rent expense )* Total utilities expense
WILLIAMS COMPANY Forecasted Departmental Income Statement For the year ended December 31, 2016 Clock Mirror Paintings Combined Sales 268800 106400 52000 427200 COGS 131712 65968 13000 210680 Gross profit 137088 40432 39000 216520 Direct expenses: Sales salaries 22000 8200 9000 39200 Advertising 2200 900 800 3900 Store supplies used 1288 616 800 2704 Dep. Of equipment 2500 700 900 4100 Total direct expenses 27988 10416 11500 49904 Allocated expenses: Rent expense 7090 4020 2423 13533 Utilities expense 2358 1337 806 4500 Share of office dept. expense 16171 6401 3128 25700 Total allocated expense 25618 11758 6357 43733 Total expense 53606 22174 17857 93637 Net income 83482 18258 21143 122883Related Questions
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