Chapter 22, Problem 3PSB

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 ($)	Amount ($)
	Movies	Video games	Compact disc	Combined
Sales (A)	648,000	216,000	300,000	1,164,000
Cost of goods sold (A - C)	453,600	166,320	195,000	814,920
Gross profit $\left(\text{C}=\text{A}\times \text{B}\right)$	194,400	49,680	105,000	349,080
Gross profit margin (B)	30%	23%	35%	30%
Direct expense
Sales salaries	37,000	15,000	18,000	70,000
Advertisement expense	12,500	6,000	10,000	28,500
Store supplies used	4,320	1,080	2,000	7,400
Deprecation-Equipment	4,500	3,000	1,200	8,700
Total direct expense	58,320	25,080	31,200	114,600
Allocated expense
Rent expense	30,750	6,000	13,250	50,000
Utilities expense	5,535	1,080	2,385	9,000
Office expense	47,320	15,773	21,907	85,000
Total allocated expense	83,605	22,853	37,542	144,000
Total expense(D)	141,925	47,933	68,742	258,600
Net Income $\left(\text{E}=\text{C}-\text{D}\right)$	52,475	1,747	36,258	90,480

Table – 1

Working notes:

1. Calculate the increased in the sales of movies department.

$\begin{array}{c}\text{Total}\text{moviesdepartment}\text{sales}=\text{Movies} \text{department}\text{sale}\times \text{\%}\text{increased}\text{in}\text{sales}\\ =\$600,000\times \frac{108}{100}\\ =\$648,000\end{array}$

2. Calculate the increased in the sales of video game department.

$\begin{array}{c}\text{Total}\text{video game}\text{department}\text{sales}=\left(\begin{array}{l}\text{Video game} \text{department}\text{sale}\\ \times \text{\%}\text{increased}\text{in}\text{sales}\end{array}\right)\\ =\text{\$200,000}\times \frac{\text{108}}{100}\\ =\$216,000\end{array}$

3. Calculate the combined increased in sales.

$\begin{array}{c}\text{Total combined}\text{sales}=\left(\begin{array}{l}\text{Sales}\text{of}\text{movies}+\text{Sales}\text{of}\text{video}\text{games}\\ +\text{Sales}\text{of}\text{compact}\text{disc}\end{array}\right)\\ =\text{\$648,000}+\text{\$216,000+\$300,000}\\ =\text{\$1,164,000}\end{array}$

4. Calculate the gross profit margin of movies department.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$180,000}{\$600,000}\\ =30\%\end{array}$

5. Calculate the gross profit margin of video games department.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$46,000}{\$200,000}\\ =23\%\end{array}$

6. Calculate the gross profit margin of combined sales.

$\begin{array}{c}\text{Gross}\text{profit}\text{margin}=\frac{\text{Gross}\text{profit}}{\text{Sale}}\\ =\frac{\$226,000}{\$1,164,000}\\ =19.42\%\end{array}$

7. Calculate the gross profit of movies department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$648,000\times 30\%\\ =\$194,400\end{array}$

8. Calculate the gross profit of video department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$216,000\times 23\%\\ =\$49,680\end{array}$

9. Calculate the gross profit of painting department.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$300,000\times 35\%\\ =\$105,000\end{array}$

10. Calculate the gross profit of combined sale.

$\begin{array}{c}\text{Gross}\text{profit}=\text{Gross}\text{profit}\text{margin}\times \text{Sale}\\ =\$1,164,000\times 19.42\%\\ =\$226,048.8\end{array}$

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

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\$648,000-\$194,400\\ =\$453,600\end{array}$

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

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\$216,000-\$49,680\\ =\$166,320\end{array}$

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

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\$300,000-\$105,000\\ =\$195,000\end{array}$

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

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}=\text{Sale}-\text{Gross}\text{profit}\\ =\text{\$1,164,000}-\text{\$226,000}\\ =\$938,000\end{array}$

15. Calculate the new rent expense of the movies department.

$\begin{array}{c}\text{New}\text{rent}\text{expense}=\text{Rent}\text{expense}\times \frac{4}{5}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$41,000}\times \frac{3}{4}\\ =\$30,750\end{array}$

16. Calculate the new rent expense of the video department.

$\begin{array}{c}\text{New}\text{rent}\text{expense}=\text{Rent}\text{expense}\times \frac{3}{4}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$9,000}\times \frac{2}{3}\\ =\$6,000\end{array}$

17. Calculate the new rent expense of the disc department.

$\begin{array}{c}\text{Rent}\text{expense}=\left[\begin{array}{c}\left(\frac{\text{Rent}\text{expense}\text{of}\text{clock}\text{department}}{4}\right)\\ +\left(\frac{\text{Rent}\text{expense}\text{of}\text{mirror}\text{department}}{3}\right)\end{array}\right]\\ =\frac{\$41,000}{4}+\frac{\$9,000}{3}\\ =\$10,250+\$3,000\\ =\$13,250\end{array}$

18. Calculate the combined rent expense.

$\begin{array}{c}\text{Combined}\text{expense}=\left(\begin{array}{l}\text{Rent}\text{expense}\text{of}\text{movies}\text{department}\\ +\text{Rent}\text{expense}\text{of}\text{vedio}\text{department}\\ +\text{Rent}\text{expense}\text{of}\text{disc}\text{department}\end{array}\right)\\ =\$30,750+\$6,000+\$13,250\\ =\$50,000\end{array}$

19. Calculate the new utilities expense of the music department.

$\begin{array}{c}\text{New}\text{utilities}\text{expense}=\text{Utilities}\text{expense}\times \frac{3}{4}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$7,380}\times \frac{3}{4}\\ =\$5,535\end{array}$

20. Calculate the new utilities expense of the video department.

$\begin{array}{c}\text{New}\text{utilities}\text{expense}=\text{Utilities}\text{expense}\times \frac{2}{3}\text{used}\text{by}\text{the}\text{department}\\ =\text{\$1,620}\times \frac{2}{3}\\ =\$1,080\end{array}$

21. Calculate the new utilities expense of the disc department.

$\begin{array}{c}\text{Utilities}\text{expense}=\left[\begin{array}{c}\left(\frac{\text{Utilities}\text{expense}\text{of}\text{music}\text{department}}{4}\right)\\ +\left(\frac{\text{Utilities}\text{expense}\text{of}\text{video}\text{department}}{3}\right)\end{array}\right]\\ =\frac{\$7,380}{4}+\frac{\$1,620}{3}\\ =\$1,845+\$540\\ =\$2,385\end{array}$

22. Calculate the office expense of the music department.

$\begin{array}{c}\text{New}\text{office}\text{expense}=\frac{\text{Sales}}{\text{Combined}\text{sale}}\times \text{Combined}\text{expense}\\ \text{=}\frac{\text{\$648,000}}{\$1,164,000}\times \$85,000\\ =\$47,320\end{array}$

23. Calculate the office expense of the video games department.

$\begin{array}{c}\text{New}\text{office}\text{expense}=\frac{\text{Sales}}{\text{Combined}\text{sale}}\times \text{Combined}\text{expense}\\ \text{=}\frac{\text{\$200,000}}{\$1,164,000}\times \$85,000\\ =\$15,773\end{array}$

24. Calculate the office expense of the disc department.

$\begin{array}{c}\text{Office}\text{expense}=\left(\begin{array}{l}\text{Total}\text{office}\text{expense}-\text{Music}\text{department}\text{expense}\\ -\text{Video}\text{games}\text{department}\text{expense}\end{array}\right)\\ =\text{\$85,000}-\text{\$47,320}-\text{\$15,733}\\ =\text{\$21,907}\end{array}$

25. Calculate the net income of the music department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\text{\$194,400}-\text{\$141,925}\\ =\$52,475\end{array}$

26. Calculate the net income of the video game department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\text{\$49,680}-\text{\$47,933}\\ =\$1,747\end{array}$

27. Calculate the net income of the disc department.

$\begin{array}{c}\text{Net}\text{income}=\text{Gross}\text{profit}-\text{Total}\text{expense}\\ =\text{\$105,000}-\text{\$68,742}\\ =\$36,258\end{array}$

Conclusion

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