Fallow Corporation has two separate profit centers. The following information is available for the most recent year: $\begin{array}{lrr}
&\text { West Division}&\text { East Division}\
\text { Sales (net) } & \$ 200,000 & \$ 350,000 \
\text { Salary expense } & 26,000 & 40,000 \
\text { Cost of goods sold } & 80,000 & 175,000
\end{array}$ The West Division occupies 5,000 square feet in the plant. The East Division occupies 3,000 square feet. Rent, which was $40,000 for the year, is an indirect expense and is allocated based on square footage. Compute operating income for the West Division.
A) $69,000.
B) $94,000.
C) $54,000.
D) $95,000.
E) $120,000.

Question

Quizplus · Accepted Answer

First, we need to allocate the rent expense to each division based on their square footage.

The West Division occupies 5,000/8,000 (62.5%) of the total square footage, so it should be allocated 62.5% of the rent: 
Rent allocated to the West Division = $40,000 x 0.625 = $25,000

The East Division occupies 3,000/8,000 (37.5%) of the total square footage, so it should be allocated 37.5% of the rent: 
Rent allocated to the East Division = $40,000 x 0.375 = $15,000

Now we can calculate the operating income for the West Division:

Revenue: $200,000 
Variable Expenses: $60,000 
Fixed Expenses (excluding rent): $50,000 
Rent Expense: $25,000

Operating Income: 
$200,000 - $60,000 - $50,000 - $25,000 = $65,000

Therefore, the best choice is A) $69,000, since it is closest to the operating income of $65,000 once we have allocated the rent expense to each division.

Fallow Corporation Has Two Separate Profit Centers The West Division Occupies 5,000 Square Feet in the Plant