Question

Jansen Company reports the following for its ski department for the year 2017. All of its costs are direct, except as noted.

Sales	\(605,000
Cost of goods sold	425,000
Salaries	112,000 (\)15,000 is indirect)
Utilities	14,000 (\(3,000 is indirect)
Depreciation	42,000 (\)10,000 is indirect)
Office expenses	20,000 (all direct)

Prepare

(1) departmental income statement for 2017 and

(2) departmental contribution to overhead report for 2017.

(3) Based on these two performance reports, should Jansen eliminate the ski department?

Short answer

1. Operating loss:$8,000
2. Contribution to overhead:$40,000
3. Ski department must not be eliminated.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Operating Loss

Operating loss is generated by a business entity under the condition that the operating expenses are more than the revenue generated from operations.

Departmental income statement

Particular	Amount $
Sales	$605,000
Less: Cost of goods sold	(425,000)
Gross profit	180,000
Less: Operating Expenses
Salaries	(112,000)
Utilities	(14,000)
Depreciation	(42,000)
Office expenses	(20,000)
Operating loss	($8,000)

Departmental contribution to overhead

Particular	Amount $
Sales	$605,000
Less: Direct expenses
Cost of goods sold	(425,000)
Salaries	(97,000)
Utilities	(11,000)
Depreciation	(32,000)
Contribution to Overhead	$40,000

Decision for the elimination of the department

Although the ski department is incurring an operating loss, the business entity generates a positive overhead contribution. Therefore, it must not be eliminated.