Rockingham Hardware Store has three departments: Tools, Lumber and Paint. The most recent departmental income statements...

Rockingham Hardware Store has three departments: Tools, Lumber and Paint. The most recent departmental income statements are shown below:

	Tools	Lumber	Paint	Company Total
Sales	$1,000,000	$525,000	$375,000	$1,900,000
Cost of goods sold	(500,000)	(400,000)	(280,000)	(1,180,000)
Gross profit	500,000	125,000	95,000	720,000
Direct expenses	(200,000)	(100,000)	(97,500)	(397,500)
Allocated expenses	(100,000)	(75,000)	(175,000)	(350,000)
Operating income (loss)	$200,000	$(50,000)	$(177,500)	$(27,500)

Based on this income statement, management is planning on eliminating both the lumber and paint departments, as they are both generating a net loss.

Required: Answer the following showing your work as much as possible where appropriate.

What type of departments (centers) are Tools, Lumber and Paint and what information supports your conclusion?
Calculate the lumber department’s contribution to overhead.
Calculate the paint department’s contribution to overhead.
Calculate total operating income (loss) for the company if both the lumber and paint departments are eliminated.
Should the lumber department be eliminated? Why or why not?
Should the paint department be eliminated? Why or why not?

Solutions

Expert Solution

ekkarill92 answered 1 year ago

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