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Below are departmental income statements for a guitar manufacturer. The manufacturer is...

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 classifiers advertising rent, and utilities expenses as indirect.

WHOLESALE GUITARS
Departmental Income Statements
For Year Ended December 31, 2017

Acoustic Electric
Sales $112m500 $105,500
Cost of goods sold 55,675 66,750
Gross profit 56,825 38,750
Operating expenses
Advertising expense 8,075 6,250
Depreciation expense-Equipment 10,150 9,000
Salaries expense 17,300 13,500
Supplies expense 2,030 1,700
Rent expense 6,105 5,950
Utilities expense 3,045 2,550
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

Total Company Acoustic Electric
Sales $218,000 $112,500 $105,500
Cost of Goods Sold 122,425 55,675 66,750
Gross Profit $95,575 $56,825 $38,750
Traceable fixed expenses
Depreciation 19,150 10,150 9,000
Salaries 30,800 17,300 13,500
Supplies 3,730 2,030 1,700
Product margin
= Contribution to overhead
$41,895 $27,345 $14,550
Common overhead expenses
Advertising 14,325
Rent 12,055
Utilities 5,595
Net operating income $9,920

Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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