Marathon running shop has two service departments

Exercise 24-1 Departmental expense allocations LO P2

Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow.

Indirect Expense

Cost

Allocation Base

Supervision

$

83,600

Number of employees

Utilities

61,000

Square feet occupied

Insurance

28,000

Value of assets in use

Total

$

172,600

Departmental data for the company’s recent reporting period follow.

Department

Employees

Square Feet

Asset Values

Materials

22

21,000

$

17,750

Personnel

11

5,250

2,130

Manufacturing

44

68,250

36,210

Packaging

33

10,500

14,910

Total

110

105,000

$

71,000

Exercise 24-3 Departmental contribution report LO P3

Below are departmental income statements for a guitar manufacturer. The manufacturer is considering dropping 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, 2013

Acoustic

Electric

Sales

$

101,700

$

84,200

Cost of goods sold

45,475

47,350

Gross profit

56,225

36,850

Operating expenses

Advertising expense

5,015

4,260

Depreciation expense-equipment

10,140

8,530

Salaries expense

19,300

17,900

Supplies expense

1,990

1,730

Rent expense

7,095

6,010

Utilities expense

2,995

2,590

Total operating expenses

46,535

41,020

Net income (loss)

$

9,690

$

(4,170

)

Exercise 24-4 Departmental expense allocation spreadsheet LO P2

Marathon Running Shop has two service departments (advertising and administration) and two operating departments (shoes and clothing). During 2013, the departments had the following direct expenses and occupied the following amount of floor space.

Department

Direct Expenses

Square Feet

Advertising

$

17,000

1,089

Administrative

18,300

1,152

Shoes

101,500

6,336

Clothing

11,800

4,224

The advertising department developed and distributed 120 advertisements during the year. Of these, 76 promoted shoes and 44 promoted clothing. The store sold $350,000 of merchandise during the year. Of this amount, $223,000 is from the shoes department, and $127,000 is from the clothing department. The utilities expense of $64,000 is an indirect expense to all departments.

Complete the departmental expense allocation spreadsheet for Marathon Running Shop. Assign (1) direct expenses to each of the four departments, (2) the $64,000 of utilities expense to the four departments on the basis of floor space occupied, (3) the advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and (4) the administrative department’s expenses to the two operating departments based on the amount of sales.

Exercise 24-5 Service department expenses allocated to operating departments LO P2

Advertising and purchasing department expenses of Cozy Bookstore are allocated to operating departments on the basis of dollar sales and purchase orders, respectively. Information about the allocation bases for the three operating departments follows.

Department

Sales

Purchase Orders

Books

$

180,000

984

Magazines

108,000

600

Newspapers

72,000

816

Total

$

360,000

2,400

Exercise 24-7 Investment center analysis LO A1

You must prepare a return on investment analysis for the regional manager of Fast & Great Burgers. This growing chain is trying to decide which outlet of two alternatives to open. The first location (A) requires a $500,000 investment and is expected to yield annual net income of $65,000. The second location (B) requires a $200,000 investment and is expected to yield annual net income of $42,000.

Compute the return on investment for each Fast & Great Burgers alternative.

Exercise 24-8 Computing return on assets and residual income; investing decision LO A1

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center

Sales

Net
Income

Average
Invested Assets

Electronics

$

10,900,000

$

617,500

$

3,250,000

Sporting goods

8,900,000

912,000

5,700,000

Exercise 24-9 Computing margin and turnover; department efficiency LO A2

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).

Investment Center

Sales

Net
Income

Average
Invested Assets

Electronics

$

9,000,000

$

670,000

$

3,750,000

Sporting goods

9,350,000

970,000

5,500,000

Exercise 24-11A Determining transfer prices LO C2

The Trailer department of Baxter Bicycles makes bike trailers that attach to bicycles and can carry children or cargo. The trailers have a retail price of $91 each. Each trailer incurs $35 of variable manufacturing costs. The Trailer department has capacity for 22,000 trailers per year, and incurs fixed costs of $550,000 per year.

Exercise 24-12B Joint real estate costs assigned LO C3

Heart & Home Properties is developing a subdivision that includes 340 home lots. The 240 lots in the Canyon section are below a ridge and do not have views of the neighboring canyons and hills; the 100 lots in the Hilltop section offer unobstructed views. The expected selling price for each Canyon lot is $57,000 and for each Hilltop lot is $92,000. The developer acquired the land for $2,400,000 and spent another $2,100,000 on street and utilities improvements.