Question

Luxurious Department Store incurred $6,000 of indirect advertising costs for its operations. The following data has been collected for 2018 for its three departments:

	Sportswear	Lingerie	Appliances
Sales	$160,000	$120,000	$120,000
Direct advertising costs	$ 7,000	$ 12,000	$ 3,000
Newspaper ad space	62%	20%	18%

How much of the indirect advertising costs will be allocated to the Lingerie Department if direct advertising costs is the activity driver? (Round to the nearest dollar if necessary)

a.$12,000

b.$6,000

c.$3,000

d.$3,273

Garden of Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs $50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of $60 per unit and $40 per unit for Dulls. The market price is $250 for Brights and $200 for Dulls.

What is the gross profit for Dulls assuming the constant gross margin percentage method is used?

a.$120,000

b.$150,000

c.$37,500

d.$200,000

Answer 1

1. (d) $3,273

Explanation:

The indirect advertising cost is allocated on the basis of the direct advertising cost.

Total direct advertising cost = $7,000 + $12,000 + $3,000 i.e. $22,000

Indirect advertising cost allocated to Lingerie Department = Indirect Advertising cost * (Direct advertising cost of Lingerie Department / Total Direct Advertising Cost)

= $6,000 * ($12,000 / $22,000)

= $3,272.727

2. (a) $120,000

Explanation:

Total Cost = Joint product cost + Post separation cost of Brights + Post separation cost of Dulls

= $50,000 + (250 units @ $60 each) + (1,000 units @ $40 each)

= $50,000 + $15,000 + $40,000

= $105,000

Total Revenue = Revenue from Brights + Revenue from Dulls

= (250 units @ $250) + (1,000 units @ $200)

= $62,500 + $200,000

= $262,500

Gross Margin = Total Revenue - Total Cost

= $262,500 - $105,000

= $157,500

Gross margin = (Cost Margin / Total Revenue) * 100

= ($157,500 / $262,500) * 100

= 60%

Assuming the same gross margin percentage method for joint product costing, the gross margin from both the products will be identical. Therefore, the gross margin of Dulls will be 60%.

Gross Margin of Dulls = Revenue from Dulls * Gross margin %

= $200,000 * 60%

= $120,000