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Exercise 22-7 Departmental contribution report LO P3
Exercise 22-7 Departmental contribution report LO P3Below 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 $ 102,600 $ 84,700 Cost of goods sold 44,275 47,650 Gross profit 58,325 37,050 Operating expenses Advertising expense 5,045 4,330 Depreciation expense—equipment 10,140 8,600 Salaries expense 20,000 17,300 Supplies expense 1,960 1,710 Rent expense 7,065 6,020 Utilities expense 2,975 2,550 Total operating expenses 47,185 40,510 Net income (loss) $ 11,140 $ (3,460 ) 1. Prepare a departmental contribution report that shows each department’s contribution to overhead.
2. Based on contribution to overhead, should the electric guitar department be eliminated?
No
Yes
1.To prepare a departmental contribution report that shows each department's contribution to overhead, we need to calculate the contributionmarginfor each department. 2.Based on contribution to overhead, the electric guitar department should not be eliminated.1.Contribution margin is the difference between the department's salesrevenueand its variable costs. Indirect expenses like advertising, rent, and utilities are not included in the contribution margin calculation as they are not directly related to theproductionof goods. Acoustic Guitar Department. Sales revenue - Cost of goods sold = Gross profit $102,600 - $44,275 = $58,325 Gross profit - Variable expenses (salaries and supplies) = Contribution margin $58,325 - ($20,000 + $1,960) = $36,365Electric Guitar Department: Sales revenue - Cost of goods sold = Gross profit $84,700 - $47,650 = $37,050 Gross profit - Variable expenses (salaries and supplies) = Contribution margin $37,050 - ($17,300 + $1,710) = $18,040. Contribution to overhead Acoustic Guitar Department: $36,365. Electric Guitar Department: $18,0402. Although the electric guitardepartmenthas a net loss, it still contributes significantly to overhead. Eliminating the department would reduce the company's total contribution to overhead and could have negative effects on other departments' profitability. Additionally, the company may want to explore ways to improve the electric guitar department's performance rather than simply eliminating it.For more such questions onmarginbrainly.com/question/28180283#SPJ11...