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Using the data below for Ace Guitar Company: Region A Region B Sales $500,000 $900,000 Cost of goods sold 200,000 300,000 Selling expenses 150,000 275,000 Service department expenses: Purchasing $90,000 Payroll accounting 30,000 Allocate service department expenses proportionally to the sales of each region, determine the divisional income from operations for the Regions A and B. For interim calculations, round the percentages to one decimal place. Region A Income $ Region B Income

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Answer:

A Region

Allocation of service department expense is $42,840

Operating Income is $107,160

B Region

Allocation of service department expense is $77,160

Operating Income is $247,840

Explanation:

A Region

Percentage of sales allocation = Sales / Total of sales of both region

= $500,000 / ($500,000 + $900,000)

= $500,000 / $1,400,000

= 35.7%

Allocation of service department expense:

= Percentage of sales allocation × (Purchasing + Payroll accounting)

= 35.7%  × ($90,000 + $30,000)

= 35.7%  ×  $120,000

= $42,840

The computation of Operating Income is as:

Operating Income = Sales - COGS - Selling expense - Allocation of service department expense

= $500,000 – $200,000 – $150,000 – $42,840

= $107,160

B Region

Percentage of sales allocation = Sales / Total of sales of both region

= $900,000 / ($500,000 + $900,000)

= $900,000 / $1,400,000

= 64.3%

Allocation of service department expense:

= Percentage of sales allocation × (Purchasing + Payroll accounting)

= 64.3%  × ($90,000 + $30,000)

= 64.3%  ×  $120,000

= $77,160

The computation of Operating Income is as:

Operating Income = Sales - COGS - Selling expense - Allocation of service department expense

= $900,000 – $300,000 – $275,000 – $77,160

= $247,840

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