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. WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2019 Acoustic Electric Sales $ 102,100 $ 84,500 Cost of goods sold 45,475 47,050 Gross profit 56,625 37,450 Operating expenses Advertising expense 5,045 4,300 Depreciation expense—Equipment 10,090 8,600 Salaries expense 19,400 17,100 Supplies expense 1,940 1,780 Rent expense 7,075 5,960 Utilities expense 3,045 2,600 Total operating expenses 46,595 40,340 Net income (loss) $ 10,030 $ (2,890 ) 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?

Answer 1

1
WHOLESALE GUITARS
Income Statement Showing Departmental Contribution to Overhead
For Year Ended December 31, 2019
	Acoustic Dept.	Electric Dept.	Combined
Sales	102100	84500	186600
Cost of goods sold	45475	47050	92525
Gross profit	56625	37450	94075
Direct expenses
Salaries expense	19400	17100	36500
Depreciation expense—equipment	10090	8600	18690
Supplies expense	1940	1780	3720
Total direct expenses	31430	27480	58910
Departmental contributions to overhead	25195	9970	35165
Indirect expenses
Rent expense			13035
Utilities expense			5645
Advertising expense			9345
Total indirect expenses			28025
Net income			7140
2
No,electric guitar department should not be eliminated