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	$	101,800		$	84,900
Cost of goods sold		45,575			47,150
Gross profit		56,225			37,750
Operating expenses
Advertising expense		5,045			4,250
Depreciation expense—Equipment		10,060			8,560
Salaries expense		19,600			17,200
Supplies expense		1,950			1,740
Rent expense		7,075			6,030
Utilities expense		3,005			2,630
Total operating expenses		46,735			40,410
Net income (loss)	$	9,490		$	(2,660	)

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?

Prepare a departmental contribution report that shows each department’s contribution to overhead.

	WHOLESALE GUITARS Income Statement Showing Departmental Contribution to Overhead For Year Ended December 31, 2019 Acoustic Dept. Electric Dept. Combined Direct expenses Total direct expenses 0 0 0 Departmental contributions to overhead $0 $0 $0 Indirect expenses Total indirect expenses 0 $0

Answer 1

ans 1
Income Statement Showing Departmental Contribution to Overhead
For Year Ended December 31, 2019
	Acoustic	Electric	Combined
Sales	101,800	84,900	186,700
Cost of goods sold	45,575	47,150	92,725
Gross profit G	56,225	37,750	93,975
Direct expenses
Depreciation expense—Equipment	10,060	8,560	18,620
Salaries expense	19,600	17,200	36,800
Supplies expense	1,950	1,740	3,690
Total direct expenses T	31,610	27,500	59,110
Departmental contribution to overhead G-T	24,615	10,250	34,865
Indirect expenses
Advertising expense			9,295
Rent expense			13,105
Utilities expense			5,635
Total Indirect expenses			28,035
Net income (loss)			6,830
ans 2
No, it should not be eliminated as Electric department has contribution of $10250
to cover fixed expenses
If any doubt please comment