Consider the following data for the year’s operations of an automobile dealer:

The president of the dealership has long regarded the markup on material
and labour for the parts and service activity as the amount that is supposed to
cover all parts and service overhead plus all general overhead of the dealership.
In other words, the parts and service department is viewed as a cost-recovery
operation, and the sales of vehicles as the income-producing activity.
1. Prepare a departmentalized operating statement that harmonizes with
the views of the president.
2. Prepare an alternative operating statement that would reflect a different
view of the dealership operations. Assume that $15,000 and
$60,000 of the $120,000 general overhead can be allocated with confidence
to the parts and service department and to sales of vehicles,
respectively. The remaining $45,000 cannot be allocated except in
some highly arbitrary manner.
3. Comment on the relative merits of requirements 1 and 2.

Transcribed Image Text:

Sales of vehicles Sales of parts and service Cost of vehicle sales Parts and service materials Parts and service labour $ 2,600,000 600,000 2,120,000 180,000 240,000 Parts and service overhead 60,000 General dealership overhead 120,000 Advertising of vehicles 120,000 Sales commissions, vehicles 48,000 Sales salaries, vehicles 60,000