Question

Williams Company began operations in January 2015 with two operating (selling) departments and one service (office) department. Its departmental income statements follow. WILLIAMS COMPANY Departmental Income Statements For Year Ended December 31, 2015 Clock Mirror Combined   Sales $ 250,000   $ 115,000   $ 365,000     Cost of goods sold 122,500   71,300   193,800        Gross profit 127,500   43,700   171,200     Direct expenses     Sales salaries 21,500   8,500   30,000       Advertising 1,500   400   1,900       Store supplies used 950   500   1,450       Depreciation—Equipment 2,000   800   2,800          Total direct expenses 25,950   10,200   36,150     Allocated expenses     Rent expense 7,100   3,600   10,700       Utilities expense 3,000   1,400   4,400       Share of office department expenses 11,500   10,000   21,500          Total allocated expenses 21,600   15,000   36,600        Total expenses 47,550   25,200   72,750        Net income $ 79,950   $ 18,500   $ 98,450      Williams plans to open a third department in January 2016 that will sell paintings. Management predicts that the new department will generate $47,000 in sales with a 75% gross profit margin and will require the following direct expenses: sales salaries, $7,000; advertising, $1,000; store supplies, $400; and equipment depreciation, $700. 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. Required: Prepare departmental income statements that show the company’s predicted results of operations for calendar year 2016 for the three operating (selling) departments and their combined totals.

WILLIAMS COMPANY Forecasted Departmental Income Statements For Year Ended December 31, 2016 Clock Mirror Paintings Combined Sales $280,000 $128,800 $47,000 $455,800 Cost of goods sold Gross profit 280,000 128,800 47,000 455,800 Direct expenses Sales salaries 21,500 8,500 7,000 37,000 Advertising 1,500 400 1,000 2,900 Store supplies used 400 Depreciation of equipment 2,000 800 700 3,500 Total direct expenses 25,000 9,700 9,100 43,400 Allocated expenses Rent expense Utilities expense Share of office dept. expenses Total allocated expenses 0 0 0 0 Total expenses 25,000 9,700 9,100 43,400 Net income $255,000 $119,100 $37,900 $412,400

Answer 1