Question

Sadar Company operates a store with two departments: videos and music. Information about those departments follows. Videos Departmen Music Department Sales .. $370,500 279500Cost of goods sold 320000 175000 Direct expenses Salaries 35,000 25000Maintenance. 12000 10000Utilities 5000 4500 Insurance 4200 3700The company also incurred the following indirect costs Advertising 15000Salaries 27000 Office expenses 3,200 Indirect costs are allocated as follows: advertising on the basis of sales; salaries on the basis of number of employees; and office expenses on the basis of square footage. Additional information about the departments follows. Department Square footage Number of employees Videos 5,000 3 Music 3,000 2Required 1. For each department, determine the departmental contribution to overhead and the departmental net income. 2. Should the video department be eliminated?

Answer 1

Answer:

Sadar Company

1. Departmental Contribution and Net Income:

                  Videos Department      Music Department

Sales                      $370,500            279,500

Cost of goods sold 320,000             175,000

Contribution          $ 50,500             104,500

Direct expenses:

Salaries                     35,000               25,000

Maintenance             12,000                10,000

Utilities                        5,000                 4,500

Insurance                    4,200                 3,700

Indirect expenses:

Advertising                 8,550                 6,450

Salaries                     16,200                10,400

Office expenses        2,000                  1,200

Total expenses:    $82,950                61,250

Net Income (Loss)  $(133,450)           43,250

2. Video Department should be eliminated from the profit point of view.  Its indirect costs of $26,750 can be absorbed by the Music Department.

Explanation:

a) Data and Calculations:

                  Videos Department      Music Department

Sales                     $370,500            279500

Cost of goods sold 320000             175000

Direct expenses:

Salaries                    35,000              25000

Maintenance             12000               10000

Utilities                        5000                4500

Insurance                    4200                3700

Indirect expenses:

Advertising                 8,550              6,450

Salaries                     16,200             10,400

Office expenses        2,000               1,200

Indirect Costs:

Advertising         15000        Sales

Salaries              27000        Number of employees

Office expenses 3,200        Square footage

Department       Square footage     Number of employees

Videos                  5,000                        3

Music                    3,000                        2

Indirect Costs Allocation:

                                          Videos Department      Music Department

Sales                                             $370,500                279,500

Advertising         15000                      8,550                    6,450

Sales                            

Salaries              27000                     16,200                  10,400

Number of employees

Office expenses 3,200                      2,000                    1,200

Square footage