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

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.

Step-by-step 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