Chapter 24, Problem 8E

To determine

Concept Introduction:

Income Statement:

The income statement can be explained as the statement giving details about the revenues, incomes, gains and expenses, losses etc. The income statement is prepared to determine net income or loss of the business by listing all the revenues, gains and expenses and losses of the business.

Contribution margin income statement:

Contribution margin income statement can be defined as the income statement which explains elements like contribution margin from the sales unlike the traditional income statement.

Requirement 1

To prepare:

Departmental Income statement for 2017

Answer to Problem 8E

Solution:

The departmental Income statement for 2017 –

Jansen Company
Ski Departmental Income Statement
Sales		605,000
Less: Cost of Goods sold		425,000
Gross profit		180,000
Less: Other Operating Expenses
Salaries	112,000
Utilities	14,000
Depreciation	42,000
Office expenses	20,000
Total operating expenses		188,000
Net Operating Income (or Loss)		-8,000

Explanation of Solution

The above explanation can be explained as under –

Given,

• Sales = $ 605,000

• Cost of goods sold = $ 425,000

• Salaries = $ 112,000

• Utilities = $ 14,000

• Depreciation = $ 42,000

• Office Expenses = $ 20,000

Gross profit –

$\begin{array}{l}\begin{array}{l}Grossprofit=Sales–CostofGoodssold\hfill \\ Grossprofit=\$605,000-\$425,000\hfill \end{array}\\ Grossprofit=\$180,000\end{array}$

Total Operating expenses –

$\begin{array}{l}\begin{array}{l}TotalOperatingexpenses=Salaries+Utilities+Depreciation+OfficeExpenses\hfill \\ TotalOperatingexpenses=\$112,000+\$14,000+\$42,000+\$20,000\hfill \end{array}\\ TotalOperatingexpenses=\$188,000\end{array}$

Net Income (or loss) –

$\begin{array}{l}\begin{array}{l}NetIncome\left(orloss\right)=GrossProfit–Totaloperatingexpenses\hfill \\ NetIncome\left(orloss\right)=\$180,000-\$188,000\hfill \end{array}\\ NetIncome\left(orloss\right)=-\$8,000\end{array}$

Conclusion

Thus, the departmental income statement has been prepared.

To determine

Requirement 2

To compute:

Department Contribution to overhead report

Answer to Problem 8E

Solution:

The department Contribution to overhead report = $ 40,000

Explanation of Solution

Jansen Company
Ski Departmental Contribution Income Statement
Sales		6,05,000
Less: Cost of Goods sold		4,25,000
Gross profit		1,80,000
Less: Other Operating Expenses -direct
Salaries	97,000
Utilities	11,000
Depreciation	32,000
Total direct operating expense		1,40,000
Net Contribution margin		40,000

The above contribution income statement provides net contribution of $ 40,000. The preparation of department contribution income statement can be explained as under –

Given,

• Sales = $ 605,000

• Cost of goods sold = $ 425,000

Only direct expenses are considered –

• Salaries = $ 97,000 (i.e. $ 97,000 as direct, as $ 15,000 is indirect)

• Utilities = $ 11,000 (i.e. $ 11,000 as direct, as $ 3,000 is indirect)

• Depreciation = $ 32,000(i.e. $ 32,000 as direct, as $ 10,000 is indirect)

• Office Expenses = $ 0 (i.e. all of the cost is indirect)

Gross profit –

$\begin{array}{l}\begin{array}{l}Grossprofit=Sales–CostofGoodssold\hfill \\ Grossprofit=\$605,000-\$425,000\hfill \end{array}\\ Grossprofit=\$180,000\end{array}$

Total Operating expenses –

$\begin{array}{l}TotalOperatingexpenses=Salaries+Utilities+Depreciation\hfill \\ TotalOperatingexpenses=\$97,000+\$11,000+\$32,000\hfill \\ TotalOperatingexpenses=\$140,000\hfill \end{array}$

Net Contribution Margin –

$\begin{array}{l}NetContributionMargin=GrossProfit–Totaloperatingexpenses\\ \begin{array}{l}NetContributionMargin=\$180,000-\$140,000\hfill \\ NetContributionMargin=\$40,000\hfill \end{array}\end{array}$

Conclusion

Thus, the contribution of Ski to overhead report has been determined.

To determine

Requirement 3

To decide:

Should Jansen eliminate the ski department?

Answer to Problem 8E

Solution:

No, Jansen should not eliminate the ski department as it is giving a positive contribution of $ 40,000 to the business.

Explanation of Solution

The above answer can be explained as under –

The Ski department is giving a positive contribution to Jansen as $ 40,000. If all of the total expenses whether direct or indirect are taken together, Ski department has a net operating loss of $ 8,000 but if only direct expenses are considered, there is positive contribution of $ 40,000 to the business.

Thus, keeping in mind this fact, Jansen should not eliminate the Ski Department from the business.

Conclusion

Thus, Jansen should not eliminate the ski department as it is giving a positive contribution of $ 40,000 to the business.