Chapter 22, Problem 4PSB

1.

To determine

The departmental contribution to overhead and the departmental net income.

Explanation of Solution

The departmental contribution to overhead and the departmental net income are determined as follows.

S. Company
Departmental Contribution Statement
Particulars	Video	Music
Sales	370,500	279,500
Cost of goods sold	320,000	175,000
Gross profit	50,500	104,500
Direct expenses
Salaries expense	35,000	25,000
Insurance	4,200	3,700
Utilities	5,000	4,500
Maintenance	12,000	10,000
Total direct expenses	56,200	43,200
Departmental contribution to overhead	(5,700)	61,300
Indirect expenses
Salaries expenses	16,200	10,800
Office expenses	2,000	1,200
Advertisement	8,550	6,450
Total indirect expenses	26,750	18,450
Net income (loss)	(32,450)	42,850

Table – 1

Hence, the Videos department suffers a net loss of $32,450 and the Music department has a net income of $42,850.

Working note:

1. Compute the percentage of the employees in department of video.

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}\text{(Video)}=\frac{\text{Employees}\text{(Video)}}{\text{Total}\text{employees}}\\ =\frac{3}{5}\times 100\\ =60\%\end{array}$

2. Compute the percentage of the employees in department of music.

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}\text{(Music)}=\frac{\text{Employees}\text{(Music)}}{\text{Total}\text{employees}}\\ =\frac{2}{5}\times 100\\ =40\%\end{array}$

3. Compute salary allocation on the basis of the percentage of the employees of department video.

$\begin{array}{c}\text{Deparment}\text{salary (Video)}=\text{Total}\text{salary}\times \text{Percentage}\text{of}\text{employees}\\ =\text{\$27,000}\times \text{60\%}\\ =\text{\$16,200}\end{array}$

4. Compute the salary allocation on the basis of the percentage of the employees of department music.

$\begin{array}{c}\text{Deparment}\text{salary (Music)}=\text{Total}\text{salary}\times \text{Percentage}\text{of}\text{employees}\\ =\text{\$27,000}\times 4\text{0\%}\\ =\text{\$10,800}\end{array}$

5. Compute the percentage of the sales in department of music and video.

$\begin{array}{c}\text{Percentage}\text{of}\text{sales (Video)}=\frac{\text{Sales (Video)}}{\text{Total}\text{sales}}\\ =\frac{370,500}{650,000}\times 100\\ =57\%\end{array}$

$\begin{array}{c}\text{Percentage}\text{of}\text{sales (Music)}=\frac{\text{Sales (Music)}}{\text{Total}\text{sales}}\\ =\frac{279,500}{650,000}\times 100\\ =43\%\end{array}$

6. Compute the advertisement expense allocation on the basis of the percentage of the sales of department music and video.

$\begin{array}{c}\text{Deparment}\text{sales (Video)}=\text{Total}\text{Advertisement}\text{expense}\times \text{Percentage}\text{of}\text{sales}\\ =\text{\$15,000}\times 57\text{\%}\\ =\text{\$8,550}\end{array}$

$\begin{array}{c}\text{Deparment}\text{sales (Music)}=\text{Total}\text{Advertisement}\text{expense}\times \text{Percentage}\text{of}\text{sales}\\ =\text{\$15,000}\times 43\text{\%}\\ =\text{\$6,450}\end{array}$

7. Compute the percentage of the area used in department of music and video.

$\begin{array}{c}\text{Percentage}\text{of}\text{area (Video)}=\frac{\text{Area (Video)}}{\text{Total}\text{area}}\\ =\frac{5000\text{sq}\text{.feet}}{8000\text{sq}\text{.}\text{feet}}\times 100\\ =62.5\%\end{array}$

$\begin{array}{c}\text{Percentage}\text{of}\text{area (Music)}=\frac{\text{Area (Music)}}{\text{Total}\text{area}}\\ =\frac{3000\text{sq}\text{.feet}}{8000\text{sq}\text{.}\text{feet}}\times 100\\ =37.5\%\end{array}$

8. Compute the office expense allocation on the basis of the percentage of the area used by department of music and video.

$\begin{array}{c}\text{Deparment}\text{office}\text{expense (Video)}=\text{Total}\text{office}\text{expense}\times \text{Percentage}\text{of}\text{area}\\ =\$\text{3,200}\times 62.5\text{\%}\\ =\$2,000\end{array}$

$\begin{array}{c}\text{Deparment}\text{office}\text{expense (Music)}=\text{Total}\text{office}\text{expense}\times \text{Percentage}\text{of}\text{area}\\ =\$\text{3,200}\times 37.5\text{\%}\\ =\$1,100\end{array}$

2.

To determine

Whether the guitar department should be eliminated.

Explanation of Solution

• Form the above information, it can be seen that departmental contribution to overhead is negative in the case of video and music.

• The total indirect expenses of the video and music department are $26,750 and $18,450 respectively.

• So, it can be said that the video department cannot recover its direct cost and it is advisable to eliminate the video department.

Conclusion

Hence, the guitar department should be eliminated.