Chapter 22, Problem 4PSB

1.

To determine

To prepare: Department contribution statement.

Explanation of Solution

S. Company
Department Contribution Statement
Particulars	Video	Music
Sales	370,500	279,500
Cost of goods sold	320,000	175,000
Gross profit	50,500	104,500
Direct expenses
Salaries expense	35,000	25,000
Insurance	4,200	3,700
Utilities	5,000	4,500
Maintenance	12,000	10,000
Total direct expenses	56,200	43,200
Departmental contribution to overhead	(5,700)	61,300
Indirect expenses
Salaries expenses	16,200	10,800
Office expenses	2,000	1,200
Advertisement	8,550	6,450
Total indirect expenses	26,750	18,450
Net income(loss)	(32,450)	42,850

Hence, video has net loss of $32,450 and music has net income of $42,850.

Working note:

Salary will be allocated to department on the basis of number of the employees,

Salary is $27,000.
Number of employ in video department is 3.
Number of employ in music department is 2.

Compute the percentage of the employees in department of video,

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}\text{(Video)}=\frac{\text{Employees}\text{(video)}}{\text{Total}\text{employees}}\\ =\frac{3}{5}\times 100\\ =60\%\end{array}$

Compute the percentage of the employees in department of music,

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}\text{(Music)}=\frac{\text{Employees}\text{(Music)}}{\text{Total}\text{employees}}\\ =\frac{2}{5}\times 100\\ =40\%\end{array}$

Compute salary allocation on the basis of the percentage of the employees of department video,

$\begin{array}{c}\text{Deparment}\text{salary(Vedio)}=\text{Total}\text{salry}\times \text{Percentage}\text{of}\text{employees}\\ =\text{\$27,000}\times \text{60\%}\\ =\text{\$16,200}\end{array}$

Compute salary allocation on the basis of the percentage of the employees of department music,

$\begin{array}{c}\text{Deparment}\text{salary(Music)}=\text{Total}\text{salry}\times \text{Percentage}\text{of}\text{employees}\\ =\text{\$27,000}\times 4\text{0\%}\\ =\text{\$10,800}\end{array}$

Allocation of the advertisement expense to the department on the basis of the sale

Given,
Advertisement expense is $15,000.
Sale of the video department is $370,500.
Sale of the Music department is $279,500.

Compute the percentage of the sales in department of music and video,

$\begin{array}{c}\text{Percentage}\text{of}\text{sales(Video)}=\frac{\text{Sales(video)}}{\text{Total}\text{sales}}\\ =\frac{370,500}{650,000}\times 100\\ =57\%\end{array}$

$\begin{array}{c}\text{Percentage}\text{of}\text{sales(Music)}=\frac{\text{Sales(Music)}}{\text{Total}\text{sales}}\\ =\frac{279,500}{650,000}\times 100\\ =43\%\end{array}$

Compute advertisement expense allocation on the basis of the percentage of the sales of department music and video,

$\begin{array}{c}\text{Deparment}\text{sales(Video)}=\text{Total}\text{Advertisement}\text{expense}\times \text{Percentage}\text{of}\text{sales}\\ =\text{\$15,000}\times 57\text{\%}\\ =\text{\$8,550}\end{array}$

$\begin{array}{c}\text{Deparment}\text{sales(Music)}=\text{Total}\text{Advertisement}\text{expense}\times \text{Percentage}\text{of}\text{sales}\\ =\text{\$15,000}\times 43\text{\%}\\ =\text{\$6,450}\end{array}$

Allocation of the office expense to the department of the video and music,

Given,
Office expense is $3,200.
Video department area is 5000sq. feet.
Music department area is 3000sq. feet.

Compute the percentage of the area used in department of music and video,

$\begin{array}{c}\text{Percentage}\text{of}\text{area(Video)}=\frac{\text{Area(vedio)}}{\text{Total}\text{area}}\\ =\frac{5000\text{sq}\text{.feet}}{8000\text{sq}\text{.}\text{feet}}\times 100\\ =62.5\%\end{array}$

$\begin{array}{c}\text{Percentage}\text{of}\text{area(Music)}=\frac{\text{Area(Music)}}{\text{Total}\text{area}}\\ =\frac{3000\text{sq}\text{.feet}}{8000\text{sq}\text{.}\text{feet}}\times 100\\ =37.5\%\end{array}$

Compute office expense allocation on the basis of the percentage of the area used by department of music and video,

$\begin{array}{c}\text{Deparment}\text{office}\text{expense(Vedio)}=\text{Total}\text{office}\text{expense}\times \text{Percentage}\text{of}\text{Area}\\ =\$\text{3,200}\times 62.5\text{\%}\\ =\$2,000\end{array}$

$\begin{array}{c}\text{Deparment}\text{office}\text{expense(Music)}=\text{Total}\text{office}\text{expense}\times \text{Percentage}\text{of}\text{Area}\\ =\$\text{3,200}\times 37.5\text{\%}\\ =\$1,100\end{array}$

2.

To determine

Elimination of guitar department.

Explanation of Solution

• Form the above information, it can be seen that departmental contribution to overhead is negative in case of video and music
• Total indirect expense of the video and music are $26,750 and $18,450 a respectively.
• So, it can be said that video cannot recover its direct cost and it is advisable to eliminate video department.