Chapter 22: Q22-7DQ (page 1012)
Is it possible to evaluate a cost center’s profitability? Explain.
No, it is not possible to evaluate the profitability of a cost center.
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Mervon Company has two operating departments: mixing and bottling. Mixing occupies 22,000 square feet. Bottling occupies 18,000 square feet. Indirect factory costs include maintenance costs of $200,000. If maintenance costs are allocated to operating departments based on square footage occupied, determine the amount of maintenance costs allocated to each operating department.
Question: Why are many companies divided into departments?
Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
Investment Center | Sales | Income | Average Invested Assets |
Electronic goods | \(40,000,000 | \)2,880,000 | 16,000,000 |
Sporting goods | 20,000,000 | 2,040,000 | 12,000,000 |
1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?
2. Assume a target income level of 12% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?
3. Assume the electronics department is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted? Explain.
R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs total \(18,000 for the tax season. Use this information to determine the
(1) selling price per composite unit,
(2) variable costs per composite unit,
(3) break-even point in composite units, and
(4) number of units of each product that will be sold at the break-even point.
Types of return | Fee charged | Variable cost per return |
Easy (Form 1040EZ) | \)50 | $30 |
Moderate (Form 1040) | 125 | 75 |
Business | 275 | 100 |
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.)
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