Question

Divisional Income Statements with Support Department Allocations

Horton Technology has two divisions, Consumer and Commercial, and two corporate support departments, Tech Services and Purchasing. The corporate expenses for the year ended December 31, 20Y7, are as follows:

Tech Services Department	$858,000
Purchasing Department	304,000
Other corporate administrative expenses	500,000
Total expense	$1,662,000

The other corporate administrative expenses include officers’ salaries and other expenses required by the corporation. The Tech Services Department allocates costs to the divisions based on the number of computers in the department, and the Purchasing Department allocates costs to the divisions based on the number of purchase orders for each department. The services used by the two divisions are as follows:

	Tech Services		Purchasing
Consumer Division	400	computers	5,300	purchase orders
Commercial Division	250		9,900
Total	650	computers	15,200	purchase orders

The support department allocations of the Tech Services Department and the Purchasing Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows:

	Consumer		Commercial
Revenues	$7,456,100		$6,118,600
Cost of goods sold	4,142,300		3,089,600
Operating expenses	1,462,500		1,529,500

Prepare the divisional income statements for the two divisions.Do not round your interim calculations.

Horton Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
		Consumer Division		Commercial Division
Revenues		$fill in the blank 2		$fill in the blank 3
Cost of goods sold		fill in the blank 5		fill in the blank 6
Gross profit		$fill in the blank 8		$fill in the blank 9
Operating expenses		fill in the blank 11		fill in the blank 12
Operating income before support department allocations		$fill in the blank 13		$fill in the blank 14
Support department allocations:
Tech service department		$fill in the blank 16		$fill in the blank 17
Purchasing department		fill in the blank 19		fill in the blank 20
Total support department allocations		$fill in the blank 21		$fill in the blank 22
Operating income		$fill in the blank 24		$fill in the blank 25

Answer 1

Answer:

Horton Technology
Divisional Income Statements
For the Year Ended December 31, 20Y7
	Consumer Division	Commercial Division
Revenues	7,456,100	6,118,600
Cost of goods sold	4,142,300	3,089,600
Gross profit	3,313,800	3,029,000
Operating expenses	1,462,500	1,529,500
Operating income before support department allocations	1,851,300	1,499,500
Support department allocations:
Tech service department	528,000	330,000
Purchasing department	106,000	198,000
Total support department allocations	634,000	528,000
Operating income	1,217,300	971,500

Calculation:

Here we need to prepare the divisional income statements for the two divisions Consumer and Commercial.

The revenues, cost of goods sold, and operating expenses for the two divisions are provided in the question. So we need to deduct the cost of goods sold from revenues to get the Gross profit.

Then we need to deduct the Operating expenses to get the Operating income before support department allocations.

Then we need to calculate the allocation of Tech Services costs to Consumer and Commercial divisions by multiplying the total department costs by the computer units ratio of both departments.

Here we need to divide the number of computers used by each department by the total number of computers.

Consumer :

Allocated Costs = $858,000 × 400 / 650 = $528,000

Commercial :

Allocated Costs = $858,000 × 250 / 650 = $330,000

Then we need to compute the allocation of Purchasing costs to Consumer and Commercial divisions by multiplying the total department costs by the purchase orders ratio of both departments.

Here we need to divide the the number of purchase orders used by each department by the total number of purchase orders.

Consumer :

Allocated Costs = $304,000 × 5,300 / 15,200 = $106,000

Commercial :

Allocated Costs = $304,000 × 9,900/ 15,200 = $198,000

After deducting these cost we get the Operating income