Question

Vortex Company operates a retail store with two departments. Information about those departments follows.

	Department A			Department B
Sales	$	825,600		$	464,400
Cost of goods sold		465,000			301,860
Direct expenses
Salaries		123,000			82,000
Insurance		12,000			10,100
Utilities		21,000			26,500
Depreciation		20,500			12,500
Maintenance		6,600			5,600

The company also incurred the following indirect costs.

Salaries	$34,000
Insurance	7,600
Depreciation	15,400
Office expenses	48,000

Indirect costs are allocated as follows: salaries on the basis of sales; insurance and depreciation on the basis of square footage; and office expenses on the basis of number of employees. Additional information about the departments follows.

Department	Square footage			Number of employees
A		28,000			77
B		12,000			33

Required:
1. Determine the departmental contribution to overhead and the departmental net income for department A and Department B. (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

Answer 1

first let us allocate the indirect costs to departments:

sales = 825,600 + 464,400 =>1,290,000

total square footage = 28,000 + 12,000 =>40,000

total employees = 77+33 =>100

cost	total	allocation to Department A	allocation to Department B
Salaries	$34,000	(34,000*825,600 / 1,290,000)=>21,760	(34,000*464,400/1,290,000)=>12,240
insurance	7,600	(7600*28,000/40,000)=>5,320	(7,600*12,000/40,000)=>2,280
depreciation	15,400	(15,400*28,000/40,000)=>10,780	(15,400*12,000/40,000)=>4,620
office expenses	48,000	(48,000*77 / 110)=>33,600	(48,000*33/110=>14,400
total	105,000	71,460	33,540

the following is the calculation of departmental contribution to overhead and departmental net income:

	Department A	Department B
sales	825,600	464,400
cost of goods sold	465,000	301,860
Gross margin	360,600	162,540
direct expenses
salaries	123,000	82,000
insurance	12,000	10,100
utilities	21,000	26,500
depreciation	20,500	12,500
maintenance	6,600	5,600
total direct expenses	183,100	136,700
departmental contribution to overhead (gross margin - direct expenses)	177,500	25,840
allocated indirect expenses
salaries	21,760	12,240
insurance	5,320	2,280
depreciation	10,780	4,620
office expenses	33,600	14,400
total allocated indirect expenses	71,460	33,540
departmental net income	106,040	(7,700)