Question

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering eliminating 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, 2019 Acoustic Electric Sales $ 102,700 $ 83,000 Cost of goods sold 44,975 47,050 Gross profit 57,725 35,950 Operating expenses Advertising expense 5,015 4,310 Depreciation expense—Equipment 10,050 8,560 Salaries expense 19,600 17,100 Supplies expense 1,970 1,710 Rent expense 7,015 5,950 Utilities expense 3,025 2,630 Total operating expenses 46,675 40,260 Net income (loss) $ 11,050 $ (4,310 ) 1. Prepare a departmental contribution report that shows each department’s contribution to overhead. 2. Based on contribution to overhead, should the electric guitar department be eliminated?

Answer 1

Answer-

WHOLESALE GUITARS
Income statement showing Departmental contribution to overhead
For year Ended December 31,2019
Particulars	Acoustic Dept	Electric Dept	Combined
Sales	$         102,700	$ 83,000	$ 185,700
Less : Cost of Goods sold	$ 44,975	$ 47,050	$ 92,025
Gross Profit	$            57,725	$           35,950	$         93,675
Direct Expenses
Depreciation Expenses-Equipment	$            10,050	$ 8,560	$         18,610
Salaries Expenses	$            19,600	$           17,100	$         36,700
Supplies Expenses	$ 1,970	$              1,710	$           3,680
Total Direct Expenses	$ 31,620	$           27,370	$         58,990
Indirect Expenses
Advertising Expenses			$ 9,325
Rent Expenses			$         12,965
Utilities Expenses			$           5,655
Total indirect Expenses			$ 27,945
Net Income	$            26,105	$ 8,580	$ 6,740

No, The Electric should not elimated though there is a loss, if we close the because of fixed expenses loss will increase.

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