Question
Prior to 2011, Starks Wholesalers Company had not kept department income statements. To achieve better management control, the company decided to install department-by-department accounts. At
Prior to 2011, Starks Wholesalers Company had not kept department income statements. To achieve better management control, the company decided to install department-by-department accounts. At the end of 2011, the new accounts showed that although as a whole the business was profitable, the dry goods department had a substantial loss. The following income statement for the dry goods department reports on operations for 2011: Starks wholesalers company Dry goods department Partial income statement for 2011 Sales $1,200,000 Cost of goods sold 800,000 Gross margin $ 400,000 Costs: Payroll, direct labor, and supervision $120,000 Commissions of sales staff a 60,000 Rent b 40,000 Insurance on inventory 20,000 Depreciation c 80,000 Administration and general office d 80,000 Interest for inventory carrying costs e 10,000 Total costs 410,000 Net income (loss) $ (10,000) A All sales staff are compensated on straight commission on sales. B Rent charged to departments on a square-foot basis. The company rents an entire building, and the dry goods department occupies 15% of the building. C Depreciation is 8.5% of the cost of the departmental equipment. D Allocated on basis of departmental sales as a fraction of total company sales. D Based on average inventory quantity multiplied by the company's borrowing rate for three-month loans. Analysis of these results has led management to suggest closing the dry goods department. Members of the management team agree that keeping the dry goods department is not essential to maintaining good customer relations and supporting the rest of the company's business. In other words, eliminating the dry goods department is expected to have no effect on the amount of business done by the other departments.
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