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Departmental income statements

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Collosal Enteretainment began operations in January 2009 with two operating (selling) departments and one service (office) department. Its departmental income statements attached.

The company plans to open a third department in January 2010 that will sell compact discs. Management predicts that the new department will generate $450,000 in sales with a 35% gross profit margin and will require the following direct expenses: sales salaries, $27,000; advertising, $15,000; store supplies, $3,000;and equipment depreciation, $1,800. The company will form 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 videogame 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 departmet to increase total office department expenses by $15,000. 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 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.

Prepare departmental income statements that show the company's predicted results oof operations for calendar year 2010 for the three operating (selling) departments and their combined totals. (Round percent o the nearest one-tenth and dollar amounts to the nearest whole dollar.)


Solution Summary

The solution explains how to prepare departmental income statements