Elegant Decor Company’s management is trying to decide whether to eliminate Depa
ID: 2590311 • 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 2015 departmental income statements shows 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 $500 per week, or $26,000 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; 69% of the insurance expense allocated to it to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to it.
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.
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.
Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts).
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.
Explanation / Answer
Workings:
ELEGANT DÉCOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Cost of goods sold 477000 208000 269000 Direct expenses: Advertising 30500 13500 17000 Store supplies used 9500 4500 5000 Depreciation-store equipment 7300 0 7300 Allocated expenses: Sales salaries 104000 36400 67600 Rent expense 14170 0 14170 Bad debts expense 17300 7700 9600 Office salary 31200 15600 15600 Insurance expense 3300 828 2472 Miscellaneous office expenses 4500 456 4044 Total expenses 698770 286984 411786Related Questions
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