Import Distributors, Inc. (IDI), imported appliances and distributed them to retail stores in the Rocky Mountain States. IDI carried three broad lines of merchandise audio equipment (tuners, tape decks, CD players, etc.), television equipment (including videotape recorders), and kitchen appliances (refrigerators, freezers, and stoves that were more compact then U.S. models). Each line accounted for about one-third of total IDI sales revenues. Although each line was referred to by IDI managers as department, until now the company had not prepared departmental income statements.

Last year, departmental accounts were set up in anticipation of preparing quarterly income statements by department starting in the current year. In early April of this year, the first such statements were distributed to the management group. Although in the first quarter IDI had earned net income amounting to 4.3% of sales, the television department had shown a gross margin that was much too small to cover the departments operating expenses. Look at exhibit 1.

The television department's poor showing prompted the company's accountant to suggest that perphaps the department should be discontinued. the accountant explained: This is exactly why I proposed that we prepare departmental statements --to see if each department is carrying its fair shre of the load.

This suggestion led to much discussion among the management group, particularly concerning two issues: First, was the first quarter of the year representative enough of longer -term results to consider discontinuing the television department? and second, would discontinuing television equipment cause a drop in sales in the other two departments? One manager, however, stated, even if the quarter was typical and the other sales wouldnt be hurt, i'm still not convinced we'd be better off dropping our television line

Income Statement for the first 3 months of this year

Net sales revenues	$1,240,310	100.0%
Less: cost of sales	1,094,210	88.2%
gross margin	146,100	11.8%
Operating Expenses
Personnel expenses (a)	7,800
Department manager's office	9,533
Rent (b)	38,544
Inventory taxes and insurance	28,672
Utilities (c)	2,312
Delivery Costs (d)	24,806
Sales Commissions (e)	62,016
Adminstrative costs (f)	31,008
Inventory financing charge (g)	18,237
total operating expenses	$222,928	18.0%
income taxes (credit)	(36,877)	(3.0%)
Net income (loss)	$(39,951)	(3.2%)

(a)These were warehouse personnel. Although merchandise in the warehouse was arranged by department, these personnel performed tasks for all three departments on any given day.

(B) Allocated to departments on the basis of square footage utilized. IDI had a 5-year non-cancelable lease.

(C) Allocated to departments on the basis of square footage utilized.

(d) Allocated on the basis of sales dollars. a delivery from IDI to a retail store typically included merchandise from all three departments.

(e)Salespersons were paid on a straight commission basis; each one sold all three lines.

(f)Allocated on the basis of sales dollars

(g) An accounting entry that was not directly related to the cost of financing inventor; assesses on average inventory, in order to motivate department managers not to carry ecessive stocks. This charge tended to about three times the company's actual out of pocket interest costs

1)Prepare a Contribution Income Statement. Below the income statement include all assumptions as notes. Each note should be numbered and the number referenced on the appropriate line in the income statement.

2)Explain specifically how you calculated inventory financing and delivery expenses. What assumptions did you use?

3)What are the financial implications if the television department is eliminated during the first three months of 1988?

4)Assume the television department had a positive contribution of about $17,000, meaning that eliminating the department during the first three months of 1988 would have left the company about $17,000 worse off. What other information would you like to have before making your decision about the department? This would be information that would either reinforce a decision to keep or influence your decision to be to eliminate the department.

5)Assume the television department had a negative contribution. What other information would you like to have before making your decision about the department? This would be information that would either reinforce a decision to keep or influence your decision to be to keep the department.