Kristen Owen and Stephen Kaplan are partners who own OK Cycling.

They sell outdoor bicycles and exercise bicycles. They keep accounts and prepare reports on a departmental basis. Direct expenses are assigned and indirect expenses are allocated to departments by various means. Selected operating information for the year ended December 31, 20--, is as follows:

Required:

1. Prepare an income statement showing departmental operating income.
2. Prepare another income statement showing departmental and total direct operating margins.
3. For the first statement, determine which department has the higher operating income percentage.
4. For the second statement, determine which department has the higher direct operating margin percentage.
5. Which of the two measures is more meaningful for decision-making purposes? Why?

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Outdoor Exercise Bicycles Bicycles Net sales Cost of goods sold Direct operating expenses: $1,612,500 $1,150,600 935,420 791,800 Store clerks' wages expense 45,000 19,500 Truck drivers' wages expense 26,000 10,000 Advertising expense 16,000 20,000 Depreciation expense-delivery equipment 12,000 0 Bad debt expense 12,000 11,700 Other operating expenses 92,080 44,840 Indirect operating expenses: Store clerks' wages expense 26,400 14,850 Truck drivers' wages expense 62,800 22,250 Advertising expense 48,200 20,500 Depreciation expense-delivery equipment 13,800 5,700 Store rent expense 21,600 14,400 Other operating expenses 197,360 111,190