Jorgensen Department Store Has Three Departments: Clothing, Toys, and Hardware

question 136

Essay

Jorgensen Department Store has three departments: Clothing, Toys, and Hardware.The most recent income statement, showing the total operating profit and departmental results is shown below:
$\begin{array}{c}\begin{array}{lll}\\\text { Sales }\\\text { Cost of goods sold }\\\text { Gross profit }\\\text { Direct expenses }\\\text { Allocated expenses }\\\text { Net income (loss) }\\\end{array}\begin{array}{lll}\underline{\text { Total }}\\{\$ 2,100,000} \\\underline{(1,260,000)}\\{840,000} \\(420,000) \\\underline{(350,000)}\\\underline{\$ 70,000}\end{array}\begin{array}{lll}\underline{\text { Clothing} }\\\$ 1,000,000 \\\underline{(500,000)}\\{500,000} \\(200,000) \\\underline{(100,000)}\\\underline{\$ 200,000}\end{array}\begin{array}{lll}\underline{\text { Toys }}\\{\$ 600,000} \\\underline{(400,000)} \\ 200,000 \\(100,000) \\\underline{(75,000)}\\\underline{25,000}\end{array}\begin{array}{lll}\underline{\text { Hardware }}\\{\$ 500,000} \\\underline{(360,000}\\140,000 \\(120,000) \\\underline{(175,000)} \\\underline{\$(155,000)}\end{array}\end{array}$ Based on this income statement, management is planning on eliminating the hardware department, as it is generating a net loss.If the hardware department is eliminated, the toy department will expand to fill the space, but sales will not change in total, nor will direct expenses.None of the allocated expenses will be avoided, but they will be reallocated.Clothing will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these expenses.
Prepare a new income statement for Jorgensen Department Store, showing the results if the Hardware Department is eliminated.Should the Hardware Department be eliminated?

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Definitions:

Direct Materials Cost

The cost of raw materials directly traceable to the production of a specific product.

Manufacturing Process

The sequence of operations or methods used to create a finished good from raw materials in a systematic and controlled manner.

Manufactured Product

A good that has undergone a transformation process from raw materials to a finished product ready for sale.

Factory Overhead Cost

The indirect costs associated with manufacturing, including utilities, rent, and salaries for support staff, that cannot be directly traced to a specific product.