Problem 23-6A Analysls of posslble ellmlnatlon of a department LO A1 The followi

Question

Problem 23-6A Analysls of posslble ellmlnatlon of a department LO A1 The following Information applies to the questions displayed below Elegant Decor Company's management Is trylng to decide whether to ellminate Department 200, whlch has produced losses or low profits for several years. The company's 2017 departmental Income statements show the followng ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended Decenber 31, 2817 Dept. 18 Dept. 288 Combined $436,899 $299,899 $726,880 Sales Cost of goods sold Gross profit Operating expenses 267, 262,808 174 409 83,699 257,608 Direct expenses 29,090 7,889 17,690 4,808 5,880 26,890 12,690 3,868 Store supplies used Depreciation-Store equipment Total direct expenses 19,189 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary 65,899 9,448 9,988 18,728 2,880 2.488 39,008 4,728 8,180 12,480 1,108 1,668 184,690 14,168 18,008 31,280 3,180 4,008 Miscellaneous office expenses Total allocated expenses Total expenses Net income (loss) 6,199 Ss S 48,548 (3,1) 37,448 19,560 In analyzing whether to ellminate Department 200, management conslders the following a. The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each b. The full salarles of two salesclerks are charged to Department 100. The full salary of one clerk Is charged to C. Elminating Department 200 would avold the sales salarles and the office salary currently allocated to It. However, earn $500 per week, or $26,000 per year for each salesclerk. Department 200. The salary of the fourth clerk, who works half-time In both departments, Is divided evenly between the two departments. management prefers another plan. Two salesclerks have Indicated that they will be quitting soon. Management belleves that thelr work can be done by the other two clerks If the one office worker works In sales half-tlme. Eliminating Department 200 will allow this shift of duties·lf this change is implemented, half the office worker's salary would be reported as sales salarles and half would be reported as office salary. d. The store bulding is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equlpment currently used by Departmet 200. e Closing Department 200 will elminate its expenses for advertising, bad debts, and store supplies; 70% of the Insurance expense allocated to it to cover its merchandise inventory: and 25% of the miscellaneous office expenses presently allocated to It Problem 23-6A Part 3 Analysis Component 3. Reconclle the company's comblned net Income with the forecasted net Income assuming that Department 200 Is eliminated (list both items and amounts). (Amounts to be deducted should be Indicated by a minus sign.) NT DECOR C Combined net income Add: Dept. 200s eliminated expenses Less: Dept. 200's lost sales Forecasted net income 37,440 31,510

Explanation / Answer

1 Report showing the total expenses .Expenses that can be eliminated by closing department 200 and the expenses that would continue reflecting the reassignment of the office worker to one half times as sales clerk. Elegant Décor Company Analysis of Expenses under elimination of department 200 Total Expenses Eliminated Expenses Continuing Expenses Direct Expenses Advertising $29,000 $12,000 $17,000 Store Supplies Used $7,800 $3,800 $4,000 Depreciation Store Equipment $8,300 $8,300 Total Direct Expenses $45,100 $15,800 $29,300 Allocated Expenses Sales Salaries $104,000 $36,400 $67,600 Rent Salaries $14,160 $14,160 Bad Debt Expenses $18,000 $8,100 $9,900 Office Salary $31,200 $15,600 $15,600 Insurance Expenses $3,100 $770 $2,330 Miscellaneous Expenses $4,000 $400 $3,600 Total Allocated Expenses $174,460 $61,270 $113,190 Calculating of Eliminating Expenses Direct Expenses Advertising(Given) $12,000 Stores Supplies Used given $3,800 Depreciation -stores equipment (No eliminating Expenses as Dept 100 will use the stores equipment) Total Direct Expenses $15,800 Allocated Expenses Sales Salaries (Existing $104000 -Continiung Exp of 2*$26000+$31200/2) $36,400 Rent Expenses (No eliminating as dept 100 will use the spacd) Bad Debt Expense -Given $8,100 Office Salary (Existing $31200-($31200/2)) $15,600 Insurance Expense (70%*1100) $770 Misc Expenses (25% *1600) $400 Total Allocated Expenses $61,270 2 Forecasted Annual Income Statement for the company after elimination of Dep 200 assuming it will not affect dep 100 sales and GP including the reassignment of the office worker to one half time as sales clerk Elegant Décor Company Forecasted Annual Income Statement with plan to eliminate dep 200 Sales $436,000 Cost of Goods Sold $262,000 Gross Profit $174,000 Operating Expenses Direct Advertising 17000 Store Supplies Used 4000 Depreciation Store Equipment 8300 Total Direct Expenses 29300 Allocated Expenses Sales Salaries 67600 Rent Salaries 14160 Bad Debt Expenses 9900 Office Salary 15600 Insurance Expenses 2330 Miscellaneous Expenses 3600 Total Allocated Expenses 113190 Total Expenses 142490 Net Income or Loss $31,510 3 Analysis Component Reconciliation of the company combined net income with the forecasted net income assuming that Dep 200 is eliminated Elegant Décor Company Reconciliation of Combined Income with Forecasted Income Combined Net Income $37,440 Loss avoiding by eliminating dep 200 $3,100 Increase in Depreciation stores equipment ($3,300) Increase in sales salaries ($2,600) Increase in Rent Expenses ($4,720) Decrease in Office Salary $3,120 Increase in Insurance Expense ($330) Increase in Misc Exp ($1,200) Forecasted Net Income $31,510

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