Chapter 24 – End-of-Chapter (EOC) Quiz
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King Galleries of Scottsdale began operations in January of this year with two operating (selling) departments and one service (office) department. Its departmental income statements follow.
King Galleries
Departmental Income Statements
For the Year Ended December 31, 20xx
Paintings Prints 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 Expense 7,020 3,780 10,800
Utilities Expense 2,600 1,400 4,000
Share of Office Dept Exp 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
The company plans to open a third department in January of next year that will sell Fine Art Photography (FAP). Management predicts 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 Equip Depreciation, $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 Custom Orders Department will fill one-fifth of the space presently used by the Paintings Department and one-fourth of the space used by the Prints Department. Management does not predict any increase in Utilities costs, which are allocated to the Departments in proportion to the occupied space (or rent expense).
The company allocated office department expenses to operating departments in proportion to their Sales. It expects the FAP Department to increase total office department expenses by $7,000.
Since the FAP Department will bring new customers into the store, management expects sales in the Residential and Commercial 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 the next calendar year for the three operating departments and their combined totals. (NOTE: Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)