Chapter 25, Problem 1MP

MASTERY PROBLEM

Bob’s Acme Supermarket has been in operation for many years, offering high-quality groceries, produce, and meat at reasonable prices. Accounting records are maintained on a departmental basis with assignment of direct expenses and allocation of indirect expenses through the use of various procedures. Selected operating information for the year ended December 31, 20--, is as follows:

REQUIRED

1. (a) Prepare an income statement showing departmental operating income.

(b) Compute the gross profit percentage and operating income percentage for each department (round to the nearest tenth of a percent).

2. (a) Prepare an income statement showing departmental and total direct operating margins.

(b) Compute the departmental direct operating margin percentage for each department (round to the nearest tenth of a percent).

3. Should Bob be concerned about the profitability of the three departments? Should any of the departments be discontinued?

To determine

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental operating income.

Explanation of Solution

Departmental operating income: The departmental income statement reports the departmental operating income, which is the excess of departmental gross profit over the operating expenses incurred.

Formula for departmental operating income:

$\text{Departmental operating income = Departmental gross profit–Operating expenses}$

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental operating income.

A Supermarket
Income Statement
For the Year Ended December 31, 20--
	Grocery	Meat	Produce	Total
Sales	$2,104,890	$660,500	$345,800	$3,111,190
Cost of goods sold	1,683,912	462,350	207,480	2,353,742
Gross profit	$420,978	$198,150	$138,320	$757,448
Operating expenses:
Store clerks’ wages expense	$137,000	$63,000	$42,500	$242,500
Advertising expense	32,000	40,500	19,400	91,900
Depreciation expense-Equipment	45,800	25,000	17,000	87,800
Store rent	60,000	20,000	20,000	100,000
Other operating expenses	53,700	33,040	54,050	140,790
Total operating expenses	328,500	181,540	152,950	662,990
Operating income	$92,478	$16,610	$(14,630)	$94,458

Table (1)

Conclusion

Thus, the income statement of A Supermarket shows a departmental operating income (loss) of $92,478 and $16,610, and $(14,630) for grocery, meat, and produce departments respectively.

To determine

Ascertain the gross profit percentage and operating income percentage for all the departments.

Explanation of Solution

Gross profit percentage: The percentage of gross profit generated by every dollar of net sales is referred to as gross profit percentage. This ratio measures the profitability of a company by quantifying the amount of income earned from sales revenue generated after cost of goods sold are paid. The higher the ratio, the more ability to cover operating expenses.

Formula to compute gross profit percentage:

$\text{Gross profit percentage }\text{= }\frac{\text{Gross profit}}{\text{Net sales}}$

Operating income percentage: This ratio gauges the operating profitability by quantifying the amount of operating income earned from business operations from the sales generated.

Formula of operating income percentage:

$\text{Operating income percentage}=\frac{\text{Operating income}}{\text{Sales}}$

Ascertain the departmental gross profit percentage for all the departments.

Departments	Departmental Gross Profit	÷	Sales	=	Departmental Gross Profit Percentage
Grocery	$420,978	÷	$2,104,890	=	20%
Meat	198,150	÷	660,500	=	30%
Produce	138,320	÷	345,800	=	40%

Table (2)

Note: Refer to Table (1) for the value and computation of departmental gross profit for all the departments.

Ascertain the operating income percentage for both the departments.

Departments	Operating Income	÷	Sales	=	Operating Income Percentage
Grocery	$92,478	÷	$2,104,890	=	4.4%
Meat	16,610	÷	660,500	=	2.5%
Produce	(14,630)	÷	345,800	=	(4.2)%

Table (3)

Note: Refer to Table (1) for the value and computation of operating income for all the departments.

Conclusion

Thus, the departmental gross profit percentage of Departments Grocery, Meat, and Produce is 20%, 30%, and 40%, and the operating income percentage of Departments Grocery, Meat, and Produce is 4.4%, 2.5% and (4.2)%.

To determine

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental direct operating margin for all the departments and the total company.

Explanation of Solution

Departmental direct operating margin: The departmental income statement reports the departmental direct operating margin, which is the excess of departmental gross profit over the direct operating expenses incurred.

Formula for departmental direct operating margin:

$\begin{array}{l}\text{Departmental direct }\\ \text{operating margin}\end{array}\}\text{ = Departmental gross profit–Direct operating expenses}$

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental direct operating margin for all the departments and the total company.

A Supermarket
Income Statement
For the Year Ended December 31, 20--
	Grocery	Meat	Produce	Total
Sales	$2,104,890	$660,500	$345,800	$3,111,190
Cost of goods sold	1,683,912	462,350	207,480	2,353,742
Gross profit	$420,978	$198,150	$138,320	$757,448
Direct operating expenses:
Store clerks’ wages expense	$125,000	$58,000	$38,500	$221,500
Advertising expense	25,000	38,500	18,400	81,900
Depreciation expense-Equipment	10,800	15,000	12,000	37,800
Other operating expenses	28,200	28,540	35,600	92,340
Total operating expenses	189,000	140,040	104,500	433,540
Direct operating margin	$231,978	$58,110	$33,820	$323,908
Indirect operating expenses:
Store clerks’ wages expense				$21,000
Advertising expense				10,000
Depreciation expense-Equipment				50,000
Store rent				100,000
Other operating expenses				48,450
Total operating expenses				229,450
Operating income				$94,458

Table (4)

Conclusion

Thus, the income statement of A Supermarket shows a departmental direct operating margin of $231,978 and $58,110, and $33,820 for grocery, meat, and produce departments respectively, and total operating income of $94,458.

To determine

Compute the departmental direct operating margin percentage of all the departments.

Explanation of Solution

Direct operating margin percentage: This ratio gauges the operating profitability by quantifying the amount of direct operating income earned from business operations from the sales generated.

Formula of direct operating margin percentage:

$\text{Direct operating margin percentage}=\frac{\text{Direct operating margin}}{\text{Sales}}$

Ascertain the direct operating margin percentage for all the departments.

Departments	Direct Operating Margin	÷	Sales	=	Direct Operating Margin Percentage
Grocery	$231,978	÷	$2,104,890	=	11.0%
Meat	58,110	÷	660,500	=	8.8%
Produce	33,820	÷	345,800	=	9.8%

Table (5)

Note: Refer to Table (4) for the value and computation of direct operating margin for all the departments.

Conclusion

Thus, the departmental direct operating margin percentage of grocery, meat, and produce departments is 11.0%, 8.8%, and 9.8% respectively.

To determine

Explain whether B should be concerned about the profitability of A Supermarket and whether to discontinue any of the departments.

Explanation of Solution

B should not concerned of the profitability of any of the departments of A Supermarket because the operating income of the department produce might not be effective, but the direct operating margin of the department is $33,820. So, produce department should not be discontinued because the operating income of the company would be reduced by $33,820, the direct operating margin of the produce department.

Conclusion

Thus, none of the departments should be discontinued.