Responsibility Accounting, Profit Centers, and Contribution Approach

Richfield Honda had the following data for the years operations:

Sales of Vehicles	$3,100,000
Sales of parts and service	$500,000
Cost of vehicle sales	$2,480,000
Parts and service materials	$100,000
Parts and service labor	$200,000
Parts and service overhead	$40,000
General dealership overhead	$180,000
Advertising of vehicles	$100,000
Sales commissions, vehicles	$155,000
Sales salaries, vehicles	$88,000

The president of the dealership has long regarded the markup on material and labor for the parts and service activity as the amount that is supposed to cover all parts and service overhead plus some general overhead of the dealership. In other words, the parts and service department is viewed as a cost-recovery operation, while the sales of vehicles is viewed 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 $30,000 and $89,000 of the $180,000 general overhead can be allocated with confidence to the parts and service department and to sales of vehicles, respectively. The remaining $61,000 cannot be allocated except in some highly arbitrary manner.

3. Comment on the relative merits of numbers 1 and 2.