Below are departmental income statements for a guitar manufacturer. The manufact

Question

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2015 Electric 102,500 S 84,600 47,750 Acoustic Sales Cost of goods sold 44,675 Gross profit Operating expenses 57,825 36,850 Advertising expense Depreciation expense-equipment Salaries expense Supplies expense Rent expense Utilities expense 5,035 10,050 20,000 1,960 7,075 3,035 4,270 8,520 17,800 1,750 5,950 2,620 Total operating expenses 47,155 40,910 Net income (loss) S 10,670 (4,060)

Explanation / Answer

1) Wholesale Guitars

Income Statement showing Departmental Contribution to Overhead

for year ended 31 December,2015 (Amount in $)

Departmental contributions to overhead

(c)=(a-b)

2) No, As the Electric department's contribution to overhead is $8,780, it should not be eliminated.

Particulars Acoustic Dept. Electric Dept. Combined Sales 102,500 84,600 187,100 Less: Cost of goods sold (44,675) (47,750) (92,425) Gross Profit (a) 57,825 36,850 94,675 Direct Expenses Depreciation on Equipment 10,050 8,520 18,570 Salaries Expense 20,000 17,800 37,800 Supplies Expense 1,960 1,750 3,710 Total Direct Expenses (b) 32,010 28,070 60,080

Departmental contributions to overhead

(c)=(a-b)

25,815 8,780 34,595 Indirect expenses Advertising Expense 5,035 4,270 9,305 Rent Expense 7,075 5,950 13,025 Utilities Expense 3,035 2,620 5,655 Total Indirect Expense (d) 15,145 12,840 27,985 Net Income (Loss) (c-d) 10,670 (4,060) 6,610

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