Elegant Decor Company’s management is trying to decide whether to eliminate Depa
ID: 2438612 • Letter: E
Question
Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2017 departmental income statements shows the following.
In analyzing whether to eliminate Department 200, management considers the following:
The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each earn $600 per week, or $31,200 per year for each salesclerk.
The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments.
Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon. Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is implemented, half the office worker’s salary would be reported as sales salaries and half would be reported as office salary.
The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200.
Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 67% of the insurance expense allocated to it to cover its merchandise inventory; and 15% of the miscellaneous office expenses presently allocated to it.
Required:
1. Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk.
2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.
Departmental Income Statements
For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined Sales $ 449,000 $ 284,000 $ 733,000 Cost of goods sold 270,000 212,000 482,000 Gross profit 179,000 72,000 251,000 Operating expenses Direct expenses Advertising 15,500 10,500 26,000 Store supplies used 5,500 5,100 10,600 Depreciation—Store equipment 4,600 3,500 8,100 Total direct expenses 25,600 19,100 44,700 Allocated expenses Sales salaries 78,000 46,800 124,800 Rent expense 9,470 4,720 14,190 Bad debts expense 9,500 7,300 16,800 Office salary 18,720 12,480 31,200 Insurance expense 2,500 1,800 4,300 Miscellaneous office expenses 2,600 1,800 4,400 Total allocated expenses 120,790 74,900 195,690 Total expenses 146,390 94,000 240,390 Net income (loss) $ 32,610 $ (22,000 ) $ 10,610
Explanation / Answer
1 Elegant Décor Company Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated expenses Continuing Expenses Cost of Goods Sold 482000 212000 270000 Direct Expenses Advertising 26000 10500 15500 Store Supplies used 10600 5100 5500 Depreciation - Store Equipment 8100 0 8100 Allocated expenses Sales salaries 124800 46800 78000 Sales salary would be eliminated Rent expenses 14190 0 14190 Bad debt expenses 16800 7300 9500 Office Salary 31200 15600 15600 Insurance expense 4300 2881 1419 4300*67% Miscellaneous office expense 4400 660 3740 4400*15% Total expenses 722390 300841 421549 2 ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales $449,000 Cost of goods sold -270,000 Gross profit from sales 179,000 Operating expenses Advertising 15,500 Store supplies used 5500 Depreciation of store equipment 8,100 Sales salaries 78000 Rent expense 14,190 Bad debts expense 9,500 Office salary 15600 Insurance expense 1419 Miscellaneous office expenses 3740 Total operating expenses 151,549 Net income $27,451
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.