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Problem #1 Departmental Income Statement It's A Wonderful Retail Life, is a chic clothing store for women. The company has three profit centers: Shoes, Handbags, and Clothing. The company has three service centers: Human Resources, Accounting, and Customer Service. The company also has two investment centers: Treasury Department and Fixed Assets Department. Sheila Davis is the Accounting Director, and she prepared the below departmental income statement. All of the service departments and investment center costs were allocated to the three profit centers. Revenues Operating Expenses Shoes 6,150,000 1,537,500 Handbags 4,950,000 1,237,500 Clothing 15,750,000 3,937,500 Income from operations before service departments & investment centers charges 4,612,500 3,712,500 11,812,500 Service Department Charges Human Resources Accounting Customer Service Subtotal 1,050,000 1,450,000 2,260,000 4,760,000 1,050,000 1,450,000 2,260,000 4,760,000 1,050,000 1,450,000 2,260,000 4,760,000 Investment Center Charges Treasury Department Fixed Assets Department Subtotal 950,000 1,200,000 2150,000 950,000 1,200,000 2,150,000 950,000 1,200,000 2,150,000 Income from Operations (2,297,500) (3,197,500) 4,902,500 Based on the above Departmental Income Statement, the accounting director is considering recommending the elimination of both the Shoes and Handbags Departments. She has contacted you for advice. Additional Information Available: Number of employees Number of customers Invested Assets Number of Invoices processed Shoes Handbags 2520 2,800 2,100 $ 2,500,000 $ 1,500,000 10,500 5,250 Clothing 55 9,100 $6,500,000 19,250 Directions: 1) Use the above information to allocate the appropriate departmental expenses to the Profit Centers. 2) Prepare a corrected Departmental Income Statement. Profit Center Reporting The divisional income statements for NEG are shown in Exhibit 5. Nova Entertainment Group Divisional Income Statements For the Year Ended December 31, 2018 Exhit Divisid Stater Theme Park Movie Production Division Division Revenues*.. $6,000,000 $2,500,000 Operating expenses.. 2,495,000 405,000 Income from operations before service department charges.... $3,505,000 $2,095,000 Service department charges: Purchasing........ $ 250,000 $ 150,000 Payroll Accounting ... 204,000 51,000 Legal. 25,000 225,000 Total service department charges .. $ 479,000 $ 426,000 Income from operations. $3,026,000 $1,669,000 *For a profit center that sells products, the income statement would show: Sales - Cost of goods sold = Gross profit. The operating expenses would be deducted from the gross profit to get the income from operations before service department charges. In evaluating the profit center manager, the income from operations should be compared over time to a budget. However, it should not be compared across profit centers because the rofit centers are usually different in terms of size, products, and customers