Question

Vortex Company operates a retail store with two departments. Information about those departments follows:

Department A Department B
Sales $832,000 $448,000
Cost of goods sold 410,000 291,200
Direct expenses:
Salaries 117,000 86,000
Insurance 13,500 10,900
Utilities 21,000 25,500
Depreciation 18,000 13,500
Maintenance 6,400 5,200

The company also incurred the following indirect costs.

Salaries $29,000
Insurance 6,600
Depreciation 14,800
Office expenses 40,000

Indirect costs are allocated as follows: salaries on the basis of sales; insurance and depreciation on the basis of square footage; and office expenses on the basis of number of employees. Additional information about the departments follows.

Department Square footage Number of employees
A 29,400 66
B 12,600 44

Required:
a. Determine the departmental contribution to overhead and the departmental net income for department A and Department B.
b. Should Department B be eliminated?

Answer 1

Vortex Company

Department A Department B

a. Contribution margin $246,100 $15,700

Net income $188,270 ($16,870)

b. Department B should not be eliminated unless the indirect costs allocated to it can be eliminated as well.

Step-by-step explanation:

a) Data and Calculations:

Department A Department B

Sales $832,000 $448,000

Cost of goods sold 410,000 291,200

Gross profit $422,000 $156,800

Direct expenses:

Salaries 117,000 86,000

Insurance 13,500 10,900

Utilities 21,000 25,500

Depreciation 18,000 13,500

Maintenance 6,400 5,200

Total direct expenses $175,900 $141,100

Contribution margin $246,100 $15,700

Total indirect expenses 57,830 32,570

Net income $188,270 ($16,870)

Department Square footage Number of employees

A 29,400 66

B 12,600 44

Total 42,000 110

Indirect Costs: Costs Rates Department A Department B

Salaries $29,000 $0.02266 $18,850 $10,150 ($448/$1,280)

Insurance 6,600 $0.15714 4,620 1,980

Depreciation 14,800 $0.35238 10,360 4,440

Office expenses 40,000 $363.64 24,000 16,000

Total costs $90,400 $57,830 $32,570