[The following information applies to the questions displayed below.] Elegant De
ID: 2491259 • Letter: #
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[The following information applies to the questions displayed below.]
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 2015 departmental income statements shows the following.
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 2015 departmental income statements shows the following.
ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2015 Dept. 100 261,000 186,000 Dept. 200 Sales Cost of goods sold $ 447,000 281,000 214,000 Comblned $ 728,000 475,000 67,000 253,000 Gross profit Operating expenses Direct expenses Advertising Store supplies used Depreciation-Store equipment 16,500 4,500 4,600 13,000 4,000 3,100 29,500 8,500 7,700 Total direct expenses 25,600 20,100 45,700 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense 65,000 9,470 9,500 18,720 1,500 2,500 39,000 4,790 7,400 12,480 700 1,800 104,000 14,260 16,900 31,200 2,200 4,300 Miscellaneous office expenses 106,690 66,170 172,860 218,560 $ 53,710 (19,270) 34,440 Total allocated expenses Total expenses 132,290 86,270 Net Income (loss) In analyzing whether to eliminate Department 200, management considers the following a. The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk Is who each earn $500 per week, or $26,000 per year for each salesclerk. charged to Department 200. The salary of the fourth clerk, who works half-time In both departments, is divided evenly between the two departments c. Eliminating Department 200 would avold 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 belleves 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 dutles. 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. d. The store bullding 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 e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 70% of the Insurance expense allocated to it to cover its merchandise Inventory, and 17% of the miscellaneous office expenses presently allocated to It.Explanation / Answer
Total Expenses Eliminated Continuing Expense Expense Direct Expense Advertising 29500 13000 16500 Store supplies used 8500 4000 4500 Depreciation - store equipment 7700 0 7700 Allocated Expenses Sales Salaries 104000 36400 67600 Rent Expense 14260 0 14260 Bad debt expense 16900 7400 9500 Office Salaries 31200 15600 15600 Insurance Expense 2200 490 1710 Miscellaneous office expenses 4300 306 3994 218560 77196 141364 Notes 1 Advertising , supplies and bad debt are completely eliminated for department 200 2 There will be no change in rent expense and deprecaition as these will continue as before 3 Insurance expense of 700 allocated to department 200 will be reduced by 70 % = 700 x 70 % , = 490 4 Miscellaneous expenses of 1800 allocated to department 200 will be reduced by 17 % = 1800 x 17 % = 306 5 50 % of Office worker's salary will continue as office salary and remaining 50 % will be transferred to sales salaries = 31200 x 50 % , =15600 6 Sales salaries of 2 sales workers will be avoided i.e = 26000 x 2 , =52000 and 50 % of office workers salary will be clubbed witl sales salaries Net amount that will be avoided = Salaries of 2 workers - allocated salary of office worker = 52000 - 15600 , = 36400
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