Reference no: EM131538827

Question: Hollywood Entertainment began operations in January 2011 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.

The company plans to open a third department in January 2012 that will sell compact discs. Management predicts that the new department will generate $250,000 in sales with a 35% gross profit margin and will require the following direct expenses: sales salaries, $18,000; advertising, $10,000; store supplies, $1,500; and equipment depreciation, $1,000. The company will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new compact disc department will fill one-fourth of the space presently used by the movie department and one-third of the space used by the video game department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the compact disc department to increase total office department expenses by $8,000. Since the compact disc department will bring new customers into the store, management expects sales in both the movie and video game departments to increase by 10%. No changes for those departments' gross profit percents or for their direct expenses are expected, except for store supplies used, which will increase in proportion to sales.

Required: Prepare departmental income statements that show the company's predicted results of operations for calendar year 2012 for the three operating (selling) departments and their combined totals. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)