Question

Bonanza Entertainment began operations in January 2017 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.

BONANZA ENTERTAINMENT
Departmental Income Statements
For Year Ended December 31, 2017
Particular	Movies	Video Games	Combined
Sales	\(600,000	\)200,000	\(800,000
Cost of goods sold	420,000	154,000	574,000
Gross profit	180,000	46,000	226,000
Direct expenses
Sales salaries	37,000	15,000	52,000
Advertising	12,500	6,000	18,500
Store supplies used	4,000	1,000	5,000
Depreciation – equipment	4,500	3,000	7,500
Total direct expenses	58,000	25,000	83,000
Allocated expenses
Rent expenses	41,000	9,000	50,000
Utilities expenses	7,380	1,620	9,000
Share of office department expenses	56,250	18,750	75,000
Total allocated expenses	104,630	29,370	134,000
Total expenses	162,630	54,370	217,000
Net income	\)17,370	(\(8,370)	\)9,000

The company plans to open a third department in January 2018 that will sell compact discs. Management predicts that the new department will generate \(300,000 in sales with a 35% gross profit margin and will require the following direct expenses: sales salaries, \)18,000; advertising, \(10,000; store supplies, \)2,000; and equipment depreciation, \(1,200. The company will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new compact disc department will fill one-fourth of the space presently used by the movie department and one-third of the space used by the video game department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the compact disc department to increase total office department expenses by \)10,000. Since the compact disc department will bring new customers into the store, management expects sales in both the movie and video game departments to increase by 8%. No changes for those departments’ gross profit percents or for their direct expenses are expected except for store supplies used, which will increase in proportion to sales.

Required

Prepare departmental income statements that show the company’s predicted results of operations for calendar-year 2018 for the three operating (selling) departments and their combined totals. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)

Short answer

The predicted combined net income is equal to $90,480.

Step-by-step solution

Definition of Cost of Goods Sold

The cost incurred in the business operations to produce the goods that are sold to the customer is known as the cost of goods sold.

Departmental income statement for the calendar year 2018

Particular	Movies	Video Games	Compact disc	Combined
Sales	$648,000	$216,000	$300,000	$1,164,000
Cost of goods sold	453,600	166,320	195,000	814,920
Gross profit	194,400	49,680	$105,000	349,080
Direct expenses
Sales salaries	37,000	15,000	18,000	70,000
Advertising	12,500	6,000	10,000	28,500
Store supplies used	4,320	1,080	2,000	7,400
Depreciation – equipment	4,500	3,000	1,200	8,700
Total direct expenses	58,320	25,080	31,200	114,600
Allocated expenses
Rent expenses	30,750	6,000	13,250	50,000
Utilities expenses	5,535	1,080	2,385	9,000
Share of office department expenses	47,345	15,725	21,930	85,000
Total allocated expenses	83,630	22,805	37,565,	144,000
Total expenses	141,950	47,885	68,765	258,600
Net income	$52,450	$1,795	$32,235	$90,480

Note:

Share of office department expenses is allocated on the basis of sales made by each department.