Chapter 22, Problem 3PSA

To determine

Department contribution statement:

Department contribution statement can be defined as a financial statement through which a company can decide whether any department should be eliminated or not. To take this decision, the company needs a departmental contribution statement. If the department contribution statement figure is negative and income is positive, then the company takes the decision to eliminate the particular department causing the loss.

To prepare: The departmental income statement to show how the company’s predicted results of operations for calendar year 2016.

Explanation of Solution

Prepare the departmental income statement to show how the company’s predicted results of operations for calendar year 2016 as shown below.

Particulars	Amount ($)	Amount ($)	Amount ($)	Amount ($)
	Clock	Mirror	Painting	Combined
Sales (A)	140,400	59,400	50,000	199,800
Cost of goods sold (A - C)	68,796	36,828	22,500	128,124
Gross profit $\left(\text{C}=\text{A}\times \text{B}\right)$	71,796	22,572	27,500	71,676
Gross profit margin (B)	51%	38%	55%	47.14%
Direct expense
Sales salaries	20,000	7,000	8,000	35,000
Advertisement expense	1,200	500	800	2,500
Store supplies used	972	432	500	1,904
Deprecation-Equipment	1,500	300	200	2,000
Total direct expense	23,672	8,232	9,500	41,404
Allocated expense
Rent expense	5,616	2,835	2,349	10,800
Utilities expense	2,080	1,050	870	4,000
Office expense	12,365.09	5,231.39	4,404	22,000
Total allocated expense	20,061	9,116	4,403.52	36,800
Total expense(D)	43,733	17,348	17,123	78,204
Net Income $\left(\text{E}=\text{C}-\text{D}\right)$	27,871	5,224	10,377	43,204

Table – 1

Working note:

1. Calculation of increase in the sales of clock department.

$\begin{array}{c}\text{Total}\text{clock} \text{department}\text{sales}=\text{Clock} \text{department}\text{sale}\times \text{Percent}\text{increased in}\text{sales}\\ =\$130,000\times \frac{108}{100}\\ =\$140,400\end{array}$

2. Calculation of increase in the sales of mirror department.

$\begin{array}{c}\text{Total}\text{mirror} \text{department}\text{sales}=\left(\begin{array}{c}\text{Mirror} \text{department}\text{sale}\times \\ \text{Percent}\text{increased}\text{in}\text{sales}\end{array}\right)\\ =\text{\$55,000}\times \frac{\text{108}}{100}\\ =\$59,400\end{array}$

3. Calculate the combined increased in sales.

$\begin{array}{c}\text{Total} \text{combined}\text{sales}= \text{Combined}\text{sale}\times \text{Percent}\text{increased}\text{in}\text{sales}\\ =\text{\$185,000}\times \frac{\text{108}}{100}\\ =\$128,124\end{array}$

4. Calculate the gross profit margin of the clock department.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$66,300}{\$130,000}\\ =51\%\end{array}$

5. Calculate the gross profit margin of the mirror department.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$20,900}{\$55,000}\\ =38\%\end{array}$

6. Calculate the gross profit margin of combined sales.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$87,200}{\$185,000}\\ =47.14\%\end{array}$

7. Calculate the gross profit of the clock department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$140,400\times 51\%\\ =\$71,604\end{array}$

8. Calculate the gross profit of mirror department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$59,400\times 38\%\\ =\$22,572\end{array}$

9. Calculate the gross profit of painting department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$50,000\times 55\%\\ =\$27,500\end{array}$

10. Calculate the gross profit of combined sale.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$199,800\times 47.14\%\\ =\$94,185.72\end{array}$

11. Calculate the cost of goods sold of clock department.

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\text{\$140,400}-\text{\$71,604}\\ \text{=\$68,796}\end{array}$

12. Calculate the cost of goods sold of mirror department.

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\text{\$59,400}-\text{\$22,572}\\ =\text{\$36,828}\end{array}$

13. Calculate the cost of goods sold of painting department.

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\text{\$50,000}-\text{\$27,500}\\ =\$22,500\end{array}$

14. Calculate the cost of goods sold of combined sales.

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\text{\$199,800}-\text{\$94,185}\text{.72}\\ =\text{\$105,614}\text{.28}\end{array}$

15. Calculate the store supplies of the clock department.

$\begin{array}{c}\text{Store}\text{suplies}\text{used}=\text{Store}\text{supplies}\times \text{\%}\text{increased}\text{in}\text{the}\text{sale}\\ =\text{\$900}\times \frac{\text{108}}{100}\\ =\$972\end{array}$

16. Calculate the store supplies of the mirror department.

$\begin{array}{c}\text{Store}\text{suplies}\text{used}=\text{Store}\text{supplies}\times \text{\%}\text{increased}\text{in}\text{the}\text{sales}\\ =\text{\$400}\times \frac{\text{108}}{100}\\ =\$432\end{array}$

17. Calculate the combined store supplies of the department.

$\begin{array}{c}\text{Combined}\text{supplies}=\left(\begin{array}{l}\text{Clock}\text{department}\text{used}\text{store}\text{supplies}\\ +\text{Mirror}\text{department}\text{used}\text{store}\text{supplies}\\ +\text{Painting}\text{department}\text{used}\text{store}\text{supplies}\end{array}\right)\\ =\$972+\$432+\$500\\ =\$1,904\end{array}$

18. Calculate the new rent expense of the clock department.

$\begin{array}{c}\text{New}\text{rent}\text{expense}=\text{Rent}\text{expense}\times \frac{4}{5}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$7,020}\times \frac{4}{5}\\ =\$5,616\end{array}$

19. Calculate the new rent expense of the mirror department.

$\begin{array}{c}\text{New}\text{rent}\text{expense}=\text{Rent}\text{expense}\times \frac{3}{4}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$3,780}\times \frac{3}{4}\\ =\$2,835\end{array}$

20. Calculate the new rent expense of the painting department.

$\begin{array}{c}\text{Rent}\text{expense}=\left[\begin{array}{c}\left(\frac{\text{Rent}\text{expense}\text{of}\text{clock}\text{department}}{\text{5}}\right)\\ +\left(\frac{\text{Rent}\text{expense}\text{of}\text{mirror}\text{department}}{\text{4}}\right)\end{array}\right]\\ =\frac{\$7,020}{5}+\frac{\$3,780}{4}\\ =\$1,404+\$945\\ =\$2,349\end{array}$

21. Calculate the combined rent expense.

$\begin{array}{c}\text{Combined}\text{expense}=\left(\begin{array}{l}\text{Rent}\text{expense}\text{of}\text{clock}\text{department}\\ +\text{Rent}\text{expense}\text{of}\text{mirror}\text{department}\\ +\text{Rent}\text{expense}\text{of}\text{painting}\text{department}\end{array}\right)\\ =\$5,616+\$2,835+\$2,349\\ =\$10,800\end{array}$

22. Calculate the new utilities expense of the clock department.

$\begin{array}{c}\text{New}\text{utilities}\text{expense}=\text{Utilities}\text{expense}\times \frac{4}{5}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$2,600}\times \frac{4}{5}\\ =\$2,080\end{array}$

23. Calculate the new utilities expense of the mirror department.

$\begin{array}{c}\text{New}\text{Utilities}\text{expense}=\text{Utilities}\text{expense}\times \frac{3}{4}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$1,400}\times \frac{3}{4}\\ =\$1,050\end{array}$

24. Calculate the new utilities expense of the painting department.

$\begin{array}{c}\text{Utilities}\text{expense}=\left[\begin{array}{c}\left(\frac{\text{Utilities}\text{expense}\text{of}\text{clock}\text{department}}{\text{5}}\right)\\ +\left(\frac{\text{Utilities}\text{expense}\text{of}\text{mirror}\text{department}}{\text{4}}\right)\end{array}\right]\\ =\frac{\$2,600}{5}+\frac{\$3,780}{4}\\ =\$520+\$945\\ =\$1,465\end{array}$

25. Calculate the office expense of the clock department.

$\begin{array}{c}\text{New}\text{Office}\text{expense}=\frac{\text{Sales}}{\text{Combined}\text{sale}}\times \text{Combined}\text{expense}\\ \text{=}\frac{\text{\$140,400}}{\$249,800}\times \$22,000\\ =\$12,365\end{array}$

26. Calculate the office expense of the mirror department.

$\begin{array}{c}\text{New}\text{Office}\text{expense}=\frac{\text{Sales}}{\text{Combined}\text{sale}}\times \text{Combined}\text{expense}\\ \text{=}\frac{\text{\$59,400}}{\$249,800}\times \$22,000\\ =\$5,231.39\end{array}$

27. Calculate the office expense of the painting department.

$\begin{array}{c}\text{Office}\text{expense}=\left(\begin{array}{l}\text{Total}\text{office}\text{expense}-\text{Clock}\text{department}\text{expense}\\ -\text{Mirror}\text{department}\text{expense}\end{array}\right)\\ =\text{\$22,000}-\text{\$12,365}\text{.09}-\text{\$5,231}\text{.39}\\ =\text{\$4,404}\end{array}$

28. Calculate the net income of the clock department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\$71,604-\$43,733\\ =\$27,871\end{array}$

29. Calculate the net income of the mirror department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\text{\$36,828}-\text{\$17,348}\\ =\$5,224\end{array}$

30. Calculate the net income of the painting department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\text{\$22,500}-\text{\$17,123}\\ =\$10,377\end{array}$

Conclusion

Hence, the departmental income statement to show how the company’s predicted results of operations for calendar year 2016 is prepared as above.