Question

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

WILLIAMS COMPANY
Departmental Income Statements
For Year Ended December 31, 2017
Particular	Clock	Mirror	Combined
Sales	\(130,000	\)55,000	\(185,000
Cost of goods sold	63,700	34,100	97,800
Gross profit	66,300	20,900	87,200
Direct expenses
Sales salaries	20,000	7,000	27,000
Advertising	1,200	500	1,700
Store supplies used	900	400	1,300
Depreciation – equipment	1,500	300	1,800
Total direct expenses	23,600	8,200	31,800
Allocated expenses
Rent expenses	7,020	3,780	10,800
Utilities expenses	2,600	1,400	4,000
Share of office department expenses	10,500	4,500	15,000
Total allocated expenses	20,120	9,680	29,800
Total expenses	43,720	17,880	61,600
Net income	22,580	3,020	25,600

Williams plans to open a third department in January 2018 that will sell paintings. Management predicts that the new department will generate \)50,000 in sales with a 55% gross profit margin and will require the following direct expenses: sales salaries, \(8,000; advertising, \)800; store supplies, \(500; and equipment depreciation, \)200. It will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new painting department will fill one-fifth of the space presently used by the clock department and one-fourth used by the mirror 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 painting department to increase total office department expenses by $7,000. Since the painting department will bring new customers into the store, management expects sales in both the clock and mirror departments to increase by 8%. No changes for those departments’ gross profit percents or 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 combined net income of all three departments is equal to$43,472.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Income Statement

The statement reflecting all the income generated and expenses incurred by the business entity is known as the income statement. This statement reports net income at the bottom line.

Departmental income statement

WILLIAMS COMPANY
Departmental Income Statements
For Year Ended December 31, 2017
Particular	Clock	Mirror	Paintings	Combined
Sales	$140,400	$59,400	$50,000	$249,800
Cost of goods sold	68,796	36,828	22,500	128,124
Gross profit	71,604	22,572	27,500	121,676
Direct expenses
Sales salaries	20,000	7,000	8,000	35,000
Advertising	1,200	500	800	2,500
Store supplies used	972	432	500	1904
Depreciation – equipment	1,500	300	200	2,000
Total direct expenses	23,672	8,232	9,500	41,404
Allocated expenses
Rent expenses	5,616	2,835	2,349	10,800
Utilities expenses	2,080	1,050	870	4,000
Share of office department expenses	10,500	4,500	7,000	22,000
Total allocated expenses	18,716	8,735	9,349	36,800
Total expenses	42,388	16,967	18,849	78,204
Net income	$29,216	$5,605	$8,651	$43,472