College Accounting, Chapters 1-27
College Accounting, Chapters 1-27
23rd Edition
ISBN: 9781337794756
Author: HEINTZ, James A.
Publisher: Cengage Learning,
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Chapter 25, Problem 1MP

MASTERY PROBLEM

Bob’s Acme Supermarket has been in operation for many years, offering high-quality groceries, produce, and meat at reasonable prices. Accounting records are maintained on a departmental basis with assignment of direct expenses and allocation of indirect expenses through the use of various procedures. Selected operating information for the year ended December 31, 20--, is as follows:

Chapter 25, Problem 1MP, MASTERY PROBLEM Bobs Acme Supermarket has been in operation for many years, offering high-quality

REQUIRED

1. (a) Prepare an income statement showing departmental operating income.

(b) Compute the gross profit percentage and operating income percentage for each department (round to the nearest tenth of a percent).

2. (a) Prepare an income statement showing departmental and total direct operating margins.

(b) Compute the departmental direct operating margin percentage for each department (round to the nearest tenth of a percent).

3. Should Bob be concerned about the profitability of the three departments? Should any of the departments be discontinued?

1-a

Expert Solution
Check Mark
To determine

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental operating income.

Explanation of Solution

Departmental operating income: The departmental income statement reports the departmental operating income, which is the excess of departmental gross profit over the operating expenses incurred.

Formula for departmental operating income:

Departmental operating income = Departmental gross profit–Operating expenses

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental operating income.

A Supermarket
Income Statement
For the Year Ended December 31, 20--
 GroceryMeatProduceTotal
Sales$2,104,890$660,500$345,800$3,111,190
Cost of goods sold1,683,912462,350207,4802,353,742
Gross profit$420,978$198,150$138,320$757,448
Operating expenses:    
 Store clerks’ wages expense$137,000$63,000$42,500$242,500
 Advertising expense32,00040,50019,40091,900
 Depreciation expense-Equipment45,80025,00017,00087,800
 Store rent60,00020,00020,000100,000
 Other operating expenses53,70033,04054,050140,790
 Total operating expenses328,500181,540152,950662,990
Operating income $92,478$16,610$(14,630)$94,458

Table (1)

Conclusion

Thus, the income statement of A Supermarket shows a departmental operating income (loss) of $92,478 and $16,610, and $(14,630) for grocery, meat, and produce departments respectively.

b.

Expert Solution
Check Mark
To determine

Ascertain the gross profit percentage and operating income percentage for all the departments.

Explanation of Solution

Gross profit percentage: The percentage of gross profit generated by every dollar of net sales is referred to as gross profit percentage. This ratio measures the profitability of a company by quantifying the amount of income earned from sales revenue generated after cost of goods sold are paid. The higher the ratio, the more ability to cover operating expenses.

Formula to compute gross profit percentage:

Gross profit percentage Gross profitNet sales

Operating income percentage: This ratio gauges the operating profitability by quantifying the amount of operating income earned from business operations from the sales generated.

Formula of operating income percentage:

Operating income percentage=Operating incomeSales

Ascertain the departmental gross profit percentage for all the departments.

DepartmentsDepartmental Gross Profit÷Sales=Departmental Gross Profit Percentage
Grocery$420,978÷$2,104,890=20%
Meat 198,150÷660,500=30%
Produce138,320÷345,800=40%

Table (2)

Note: Refer to Table (1) for the value and computation of departmental gross profit for all the departments.

Ascertain the operating income percentage for both the departments.

DepartmentsOperating Income÷Sales=Operating Income Percentage
Grocery$92,478÷$2,104,890=4.4%
Meat 16,610÷660,500=2.5%
Produce(14,630)÷345,800=(4.2)%

Table (3)

Note: Refer to Table (1) for the value and computation of operating income for all the departments.

Conclusion

Thus, the departmental gross profit percentage of Departments Grocery, Meat, and Produce is 20%, 30%, and 40%, and the operating income percentage of Departments Grocery, Meat, and Produce is 4.4%, 2.5% and (4.2)%.

2-a

Expert Solution
Check Mark
To determine

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental direct operating margin for all the departments and the total company.

Explanation of Solution

Departmental direct operating margin: The departmental income statement reports the departmental direct operating margin, which is the excess of departmental gross profit over the direct operating expenses incurred.

Formula for departmental direct operating margin:

Departmental direct operating margin} = Departmental gross profit–Direct operating expenses

Prepare an income statement for A Supermarket for the year ended December 31, 20--, showing the departmental direct operating margin for all the departments and the total company.

A Supermarket
Income Statement
For the Year Ended December 31, 20--
 GroceryMeatProduceTotal
Sales$2,104,890$660,500$345,800$3,111,190
Cost of goods sold1,683,912462,350207,4802,353,742
Gross profit$420,978$198,150$138,320$757,448
Direct operating expenses:    
 Store clerks’ wages expense$125,000$58,000$38,500$221,500
 Advertising expense25,00038,50018,40081,900
 Depreciation expense-Equipment10,80015,00012,00037,800
 Other operating expenses28,20028,54035,60092,340
 Total operating expenses189,000140,040104,500433,540
Direct operating margin$231,978$58,110$33,820$323,908
Indirect operating expenses:
 Store clerks’ wages expense   $21,000
 Advertising expense   10,000
 Depreciation expense-Equipment   50,000
 Store rent   100,000
 Other operating expenses48,450
 Total operating expenses229,450
Operating income    $94,458

Table (4)

Conclusion

Thus, the income statement of A Supermarket shows a departmental direct operating margin of $231,978 and $58,110, and $33,820 for grocery, meat, and produce departments respectively, and total operating income of $94,458.

b.

Expert Solution
Check Mark
To determine

Compute the departmental direct operating margin percentage of all the departments.

Explanation of Solution

Direct operating margin percentage: This ratio gauges the operating profitability by quantifying the amount of direct operating income earned from business operations from the sales generated.

Formula of direct operating margin percentage:

Direct operating margin percentage=Direct operating marginSales

Ascertain the direct operating margin percentage for all the departments.

DepartmentsDirect Operating Margin÷Sales=Direct Operating Margin Percentage
Grocery$231,978÷$2,104,890=11.0%
Meat58,110÷660,500=8.8%
Produce 33,820÷345,800=9.8%

Table (5)

Note: Refer to Table (4) for the value and computation of direct operating margin for all the departments.

Conclusion

Thus, the departmental direct operating margin percentage of grocery, meat, and produce departments is 11.0%, 8.8%, and 9.8% respectively.

3.

Expert Solution
Check Mark
To determine

Explain whether B should be concerned about the profitability of A Supermarket and whether to discontinue any of the departments.

Explanation of Solution

B should not concerned of the profitability of any of the departments of A Supermarket because the operating income of the department produce might not be effective, but the direct operating margin of the department is $33,820. So, produce department should not be discontinued because the operating income of the company would be reduced by $33,820, the direct operating margin of the produce department.

Conclusion

Thus, none of the departments should be discontinued.

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Chapter 25 Solutions

College Accounting, Chapters 1-27

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