Elegant Decor Company’s management is trying to decide whether to eliminate Depa

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:

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined $439,000 282,000 $721,000 Sales Cost of goods sold Gross profit Operating expenses 170,000 6 8483,000 238,000 269,000 68,000 Direct expenses Advertising Store supplies used Depreciation-Store equipment Total direct expenses 15,000 5,000 4,600 24,600 10,000 4,500 2,900 17,400 25,000 9,500 7,500 42,000 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total allocated expenses 31,200 4,770 7,800 12,480 1,600 2,000 95,195Q 197,040 52,000 9,470 9,900 18,720 2,500 2,600 83,200 14,240 17,700 31,200 4,100 4,600 155,040 59,850 77,250 119,790 :259 $ 50,210 $ (9,250) Total expenses Net income (loss)

Explanation / Answer

ELEGANT DECOR COMPANY Total Eliminated Continuing Expeneses Expeneses Expeneses Direct expenses     Advertising 25000 10000 15000     Stores supplies used 9500 4500 5000     Depreciation - stores equipment 7500 7500 Total direct expenses 42000 14500 27500 Allocated expenses     Sales salaries 99800 41600 58200     Rent expense 14240 14240     Bad debts expense 17700 7800 9900     Office salary 16600 16600     Insurance expense 4100 1120 2980     Miscellaneous office expenses 4600 500 4100 Total aloocated expenses 157040 51020 106020 Total expenses 199040 65520 133520 1.If 2 sales workers quit ,the company will be left with two sales clerks,      who can be allocated to Department 100 as at present. 2. Office salary will be 16,600 and the balance will be reported as sales salary i.e., 16,600. 3. 70% of insurance expense allocated to Department 200       i.e., $1,120 (70% of $1,600) will be eliminated. 4. 25% of miscellaneous expenses allocated to Department 200      i.e., $500 (25% of $2,000) will be eliminated

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