Question

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering eliminating its electric guitar department since it has a net loss. The company classifies advertising, rent, and utilities expenses as indirect.

WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2019
	Acoustic			Electric
Sales	$	103,100		$	84,200
Cost of goods sold		44,575			47,250
Gross profit		58,525			36,950
Operating expenses
Advertising expense		5,045			4,280
Depreciation expense—Equipment		10,120			8,580
Salaries expense		19,900			17,500
Supplies expense		1,970			1,730
Rent expense		7,085			6,040
Utilities expense		2,985			2,640
Total operating expenses		47,105			40,770
Net income (loss)	$	11,420		$	(3,820	)

1. Prepare a departmental contribution report that shows each department’s contribution to overhead.
2. Based on contribution to overhead, should the electric guitar department be eliminated?

Prepare a departmental contribution report that shows each department’s contribution to overhead.

WHOLESALE GUITARS
Income Statement Showing Departmental Contribution to Overhead
For Year Ended December 31, 2019
	Acoustic Dept.	Electric Dept.	Combined
Direct expenses
Total direct expenses
Departmental contributions to overhead
Indirect expenses
Total indirect expenses

Based on contribution to overhead, should the electric guitar department be eliminated?

Based on contribution to overhead, should the electric guitar department be eliminated?

Answer 1

1
WHOLESALE GUITARS
Income Statement Showing Departmental Contribution to Overhead
For Year Ended December 31, 2019
	Acoustic Dept.	Electric Dept.	Combined
Sales	103100	84200	187300
Cost of goods sold	44575	47250	91825
Gross profit	58525	36950	95475
Direct expenses
Salaries expense	19900	17500	37400
Depreciation expense—equipment	10120	8580	18700
Supplies expense	1970	1730	3700
Total direct expenses	31990	27810	59800
Departmental contributions to overhead	26535	9140	35675
Indirect expenses
Rent expense			13125
Utilities expense			5625
Advertising expense			9325
Total indirect expenses			28075
Net income			7600
2
No, electric guitar department should not be eliminated.
Electric Guitar department contribution to overhead is $9140