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. Electric $84,600 46,950 37,650 WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2019 Acoustic Sales $102,900 Cost of goods sold 43,875 Gross profit 59,025 Operating expenses Advertising expense 5,005 Depreciation expense-Equipment 10,130 Salaries expense 20, 300 Supplies expense 2,010 Rent expense 7,025 Utilities expense 2,965 Total operating expenses 47,435 Net income (loss) $ 11,590 4,350 8,530 17,500 1,770 6,840 2,640 40,830 $(3,180) 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? Complete this question by entering your answers in the tabs below.

Answer 1

Answer:

1.)

WHOLESALE GUITARS Income Statement Showing Departmental Contribution Statements to Overhead For the Year Ended December 31, 2019
Particulars	Acoustic Department	Electric Department	Combined
Sales	102900	84600	187500
Cost of goods sold	43875	46950	90825
Gross profit	59025	37650	96675
Direct expenses:
Salaries expense	20300	17500	37800
Depreciation expenses on equipment	10130	8530	18660
Supplies expense	2010	1770	3780
Total direct expenses	32440	27800	60240
Departmental Contributions to Overhead	26585	9850	36435
Indirect expense:
Rent expense			13065
Utilities expense			5605
Advertising expense			9355
Total indirect expense			28025
Operating Inocme			8410

2.)
In Wholesale Guitars two departments are operational which are Acoustic and Electric. Combine gross profit of both departments is $96675 and out of which 36435 are direct expenses. Out of direct expenses, $9850 is expenses of electric department. As it covers material amount, hence it should not be eliminated.