Advertisig and purchasing department expense of Cozy bookstore are allocated to

Question

Advertisig and purchasing department expense of Cozy bookstore are allocated to operating departments on the basis of a dollar sales and purchases order respectively. Information about the alocation bases for the three operating departments. Book sales 495.00 Purchase Order 516 Magazine Sales 198.00 P/o 360 Newpapers 207,00 p/o 324. Tota; 900,00 Sales p/o 1200 Cpmplete the following table by allocating the expenses of the two service departments 9advertising and purchases0 to the three operating departments 9see the expenses below)

Advertising      Allocation Base        Percent of Allocation Base           Cost to be Allocated      Allocation Cost

Department                                        Numerator      Denominator  %of Total     

Books Dept

Magazine Deptt..

newspaper Dept

Total         and

Purchasing       AllocationBase      Percent of      allocation base cost to be allovated allocated cosr                                                                                                                                                                               

Explanation / Answer

We start from the base income formula:

Revenue - Expenses = Profit
Since break-even is the point where revenue equals expenses and profit is zero, the base formula becomes:

Revenue = Expenses
Let's look at each component.

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Revenue
Revenue is income from sales and is determined by multiplying the selling price by the quantity sold. Revenue usually increases in a linear manner from zero at no sales, and stays directly proportional to sales unless you give quantity discounts, which we will ignore for this exercise. (Learn more about the different types of discounts.)

Revenue = (Price per unit) x (Quantity)

Revenue = P x Q

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Expenses
Expenses can be categorized into either Fixed Costs, Variable Costs, or Mixed costs (some of both). Expenses don't start from zero, because unless you are out of business, there are some expenses even if you aren't making or selling anything. These expenses with no production are all fixed costs. Expenses then go up in proportion to sales because of variable costs. (See our article on Fixed Costs and Variable Costs, how to identify them, and how to split Mixed costs into their fixed and variable components.)

Expenses = Fixed Costs + Variable Costs

Expenses = F + V

Variable Costs are the cost per unit times the quantity

Variable Costs = Unit Cost x Quantity

V = C x Q

Expenses = F + (C x Q)

Now lets do a little algebraic substitution to combine these components to determine the formulas for break even.

Revenue = Expenses

P x Q = F + (C x Q)

Now we solve for Q (the quantity at which break even occurs).

P x Q = F + (C x Q)

(P x Q) - (C x Q) = F

Q(P -C) = F

Q = F/(P - C)

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