Vortex Company operates a retail store with two departments.
Information about those departments follows.
Department ADepartment B
Sales$838,500 $451,500
Cost of goods sold 440,000 293,475
Direct expenses
Salaries 115,000 83,000
Insurance 19,000 10,700
Utilities 22,000 28,500
Depreciation 15,500 13,500
Maintenance 6,200 5,300
The company also incurred the following indirect costs.
Salaries$31,000
Insurance7,200
Depreciation15,400
Office expenses41,000
Indirect costs are allocated as follows: salaries on the basis of
sales; insurance and depreciation on the basis of square footage;
and office expenses on the basis of number of employees. Additional
information about the departments follows.
DepartmentSquare footageNumber of employees
A 30,800 84
B 13,200 36
Required:
1. Determine the departmental contribution to overhead and the
departmental net income for department A and Department B. (Do not
round intermediate calculations. Round your final answers to
nearest whole dollar.)
2. Should Department B be eliminated?
Yes
No
Department A | Department B | |
Sales | $838500 | $451500 |
Less: Cost of goods sold | (440000) | (293475) |
Gross profit | 398500 | 158025 |
Less: Direct expenses | ||
Salaries | 115000 | 83000 |
Insurance | 19000 | 10700 |
Utilities | 22000 | 28500 |
Depreciation | 15500 | 13500 |
Maintenance | 6200 | 5300 |
Total direct expenses | 177700 | 141000 |
Departmental contribution overhead | 220800 | 17025 |
Less: Indirect expenses | ||
Salaries | 20150 | 10850 |
Insurance | 5040 | 2160 |
Depreciation | 10780 | 4620 |
Office expenses | 28700 | 12300 |
Total indirect expenses | 64670 | 29930 |
Operating income (loss) | $156130 | $(12905) |
Allocation of indirect costs
Total sales= $838500+451500= $1290000
Salaries
Department A= $31000*838500/1290000= $20150
Department B= $31000*451500/1290000= $10850
Insurance
Total Square footage= 30800+13200= 44000
Department A= $7200*30800/44000= $5040
Department B= $7200*13200/44000= $10850
Depreciation
Department A= $15400*30800/44000= $10780
Department B= $15400*13200/44000= $4620
Office expenses
Total number of employees= 84+36= 120
Department A= $41000*84/120= $28700
Department B= $41000*36/120= $12300
2) No, Department B should not be eliminated because Department B is contributing $17025 toward indirect cost and if Department B is eliminated all the indirect cost will be contributed toward Department A by which operating income of Department A will decrease. So, Department B should not be eliminated.
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