Bonanza Entertainment began operations in January 2019 with two operating (selling) departments and one service(office) department. Its departmental income statements follow.

The company plans to open a third department in January 2020 that will sell compact discs. Management predicts that the new department will generate $300,000 in sales with a 35% gross profit margin and will require the following direct expenses: sales salaries, $18,000; advertising, $10,000; store supplies, $2,000; and equipment depreciation, $1,200. 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 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 Video Game 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 department to increase total office department expenses by$10,000. 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 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 calendar-year 2020 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.)

Transcribed Image Text:

Departmental Income Statements For Year Ended December 31, 2019 Movles Video Games Combined $200,000 $600,000 $800,000 Sales Cost of goods sold . 420,000 154,000 574,000 Gross profit... 180,000 46,000 226,000 Direct expenses 37,000 Sales salaries . 15,000 52,000 Advertising ... 12,500 6,000 18,500 Store supplies used 4,000 1,000 5,000 Depreciation-Equipment . 7,500 4,500 3,000 Total direct expenses. 58,000 25,000 83,000 Allocated expenses Rent expense .. 41,000 9,000 50,000 1,620 Utilities expense. 7,380 9,000 Share of office department expenses. 56,250 18,750 75,000 Total allocated expenses. 29,370 104,630 134,000 Total expenses 162,630 54,370 217,000 $ (8,370) $ 17,370 $ 9,000 Net income (loss)