Day Street Deli’s owner is disturbed by the poor profit performance of his ice c

Question

Day Street Deli’s owner is disturbed by the poor profit performance of his ice cream counter. He has prepared the following profit analysis for the year just ended.

Required:

Correct the owner's profit analysis for the year just ended.

Sales $ 45,000 Less: Cost of food 20,000 Gross profit $ 25,000 Less: Operating expenses: Wages of counter personnel $ 12,000 Paper products (e.g., napkins) 4,000 Utilities (allocated) 2,900 Depreciation of counter equipment and furnishings 2,500 Depreciation of building (allocated) 4,000 Deli manager’s salary (allocated) 3,000 Total 28,400 Loss on ice cream counter $ (3,400 )

Explanation / Answer

There is a need to compute product contribution:

Gross Profit                             $25000
Less: Operating Expenses
        Wages                              $12000
        Paper Products                  $4000
Product Contribution                   $9000

Here the contribution from product is positive hence the product should be dropped.

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