Question

Problem 22-4A Departmental contribution to income LO P3 Vortex Company operates a retail store with two departments. Information about those departments follows. Department A Department B Sales $ 806,400 $ 453,600 Cost of goods sold 430,000 294,840 Direct expenses Salaries 124,000 81,000 Insurance 14,000 10,100 Utilities 22,500 30,000 Depreciation 17,500 13,000 Maintenance 6,300 5,000 The company also incurred the following indirect costs. Salaries $33,000 Insurance 6,200 Depreciation 15,000 Office expenses 45,000 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 34,300 72 B 14,700 48 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.) 2. Should Department B be eliminated? Yes No

Answer 1

1. Determine the departmental contribution to overhead and the departmental net income for department A and Department B.
Vortex Company
Departmental Income Statements
	Dept. A	Dept. B
Sales	806400	453600
Cost of goods sold	430000	294840
Gross margin	376400	158760
Direct expenses
Salaries	124000	81000
Insurance	14000	10100
Utilities	22500	30000
Depreciation	17500	13000
Maintenance	6300	5000
Total direct expenses	184300	139100
Departmental contribution to overhead	192100	19660
Allocated indirect expenses
Salaries	21120	11880
Insurance	4340	1860
Depreciation	10500	4500
Office expenses	27000	18000
Total allocated indirect expenses	62960	36240
Departmental net income	129140	-16580
2. Should Department B be eliminated?
No, because the departmental contribution to overhead is a positive amount.

Above figures have been calculated in the following manner:

1. Determine the departmental contribution to overhead and the departmental net income for department A and Department B.
Vortex Company
Departmental Income Statements
	Dept. A	Dept. B
Sales (a)	806400	453600
Cost of goods sold (b)	430000	294840
Gross margin (c) = (a - b)	376400	158760
Direct expenses
Salaries	124000	81000
Insurance	14000	10100
Utilities	22500	30000
Depreciation	17500	13000
Maintenance	6300	5000
Total direct expenses (d)	184300	139100
Departmental contribution to overhead (e) = (c - d)	192100	19660
Allocated indirect expenses
Salaries	=33000*(B7/(B7+C7))	=33000*(C7/(B7+C7))
Insurance	=6200*(34300/(34300+14700))	=6200*(14700/(34300+14700))
Depreciation	=15000*(34300/(34300+14700))	=15000*(14700/(34300+14700))
Office expenses	=45000*(72/(72+48))	=45000*(48/(72+48))
Total allocated indirect expenses (f)	62960	36240
Departmental net income (e - f)	129140	-16580
2. Should Department B be eliminated?
No, because the departmental contribution to overhead is a positive amount.