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, 2017
	Acoustic			Electric
Sales	$	103,400		$	83,000
Cost of goods sold		43,975			47,250
Gross profit		59,425			35,750
Operating expenses
Advertising expense		5,025			4,320
Depreciation expense—equipment		10,090			8,560
Salaries expense		19,400			17,800
Supplies expense		1,980			1,790
Rent expense		7,045			5,980
Utilities expense		2,955			2,570
Total operating expenses		46,495			41,020
Net income (loss)	$	12,930		$	(5,270	)

1. Prepare a departmental contribution report that shows each department’s contribution to overhead.

	WHOLESALE GUITARS Income Statement Showing Departmental Contribution to Overhead For Year Ended December 31, 2017 Acoustic Dept. Electric Dept. Combined Direct expenses Total direct expenses Departmental contributions to overhead Indirect expenses Total indirect expenses

2 Based on contribution to overhead, should the electric guitar department be eliminated?

Yes or No

Answer 1

Ans. 1	WHOLESALE GUITARS
	Income Statement Showing Departmental Contribution to Overhead
	For Year Ended December 31, 2017
	Particulars	Acoustic Department	Electric Department	Combined
	Sales	$103,400	$83,000	$186,400
	Cost of goods sold	$43,975	$47,250	$91,225
	Gross profit	$59,425	$35,750	$95,175
	Direct expenses:
	Depreciation expense - equipment	$10,090	$8,560	$18,650
	Salaries expense	$19,400	$17,800	$37,200
	Supplies expense	$1,980	$1,790	$3,770
	Total direct expenses	$31,470	$28,150	$59,620
	Departmental contributions to overhead	$27,955	$7,600	$35,555
	Indirect expenses:
	Advertising expense			$9,345
	Rent expense			$13,025
	Utilities expense			$5,525
	Total indirect expenses			$27,895
	Net income			$7,660
	Calculations for Combined Indirect expenses:
	Advertising expense	$5,025 + $4,320
	Rent expense	$7,045 + $5,980
	Utilities expense	$2,955 + $2,570
Ans. 2	No, Electric Guitar Department should not be eliminated as it is generating the profit.