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Problem - Below are departmental income statements for a guitar manufacturer. The manufacturer is considering eliminating its electric guitar department since it has a net loss. The company classifies advertising, rent and utilities expenses as indirect.
WHOLESALE GUITARS Departmental Income Statements For Year Ended December 31, 2019
Acoustic
Electric
Sales
$102,600
$83,600
Cost of goods sold
44,375
47,050
Gross profit
58,225
36,550
Operating expenses
Advertising expense
5,005
4,300
Depreciation expense-Equipment
10,140
8,510
Salaries expense
19,500
17,900
Supplies expense
2,030
1,800
Rent expense
7,055
5,980
Utilities expense
2,945
2,630
Total operating expenses
46,675
41,120
Net income (loss)
$11,550
$(4,570)
Required -
1. Prepare a departmental contribution report that shows each department's contribution to overhead.
2. Based on contribution to overhead, should the electric guitar department be eliminated?
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