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 classifiers advertising rent, and utilities expenses as indirect.
|Departmental Income Statements|
|For Year Ended December 31, 2017|
|Cost of goods sold||55,675||66,750|
|Total operating expenses||46,705||38,950|
|Net Income (loss)||$10,120||$(200)|
Prepare a departmental contribution report that shows each department's contribution to overhead.
Dropping a Product:
In order to decide whether it will be profitable to drop a product, the product's contribution to common overhead expenses should be considered, rather than its net operating income as per the financial reports.
Answer and Explanation:
Departmental contribution report
|Cost of Goods Sold||122,425||55,675||66,750|
|Traceable fixed expenses|
= Contribution to overhead
|Common overhead expenses|
|Net operating income||$9,920|
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12