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:

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Discount Rate

The interest rate applied within the framework of discounted cash flow analysis to estimate the present value of future cash inflows.

Present Value

The present-day worth of money expected in the future or series of cash flows, calculated using a fixed rate of return.

Compounded Monthly

The process where interest is added to the principal amount each month, and future interest is earned on the increased balance.