Question
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.
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 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined $282,000 213,000 Sales Cost of goods sold Gross profit Operating expenses $447,000 267,000 $729,000 180,000 o480,000 69,000 249,000 Direct expenses Advertising Store supplies used Depreciation-Store equipment Total direct expenses 17,500 5,500 4,800 27,800 12,500 5,000 3,100 20,600 30,000 10,500 7,900 48,400 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total allocated expenses 78,000 9,480 9,400 18,720 1,900 2,600 120,100 147,900 $.32, 100 46,800 4,760 7,100 12,480 1,100 1,900 74,140 94,740 $(25,740) 124,800 14, 240 16,500 31,200 3,000 4,500 194, 240 242,640 6,360 Total expenses 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 who each earn $600 per week, or $31,200 per year for each salesclerk b. 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. c. 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 d. 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 e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 74% of the insurance expense allocated to it to cover its merchandise inventory; and 23% of the miscellaneous office expenses presently allocated to it.
Explanation / Answer
Computation of analysis of expenses under elimination of department 200:
Total expense
Eliminated expenses
Continuing expenses
Cost of goods sold
480,000
213,000
267,000
Direct expense
Advertising
30,000
12,500
17,500
Store supplies used
10,500
5,000
5,500
Depreciation (store equipment)
7,900
7,900
Allocated expenses
Sales salaries
124,800
46,800
78,000
Rent expense
14,240
14,240
Bad debt expenses
16,500
7,100
9,400
Office salary
31,200
31,200/ 4clerks*2 = 15,600
15,600
Insurance expenses
3,000
1,100*74% = 814
2,186
Miscellaneous office expenses
4,500
1,900*23% = 437
4,063
Total expenses
722,640
301,251
421,389
Total expense
Eliminated expenses
Continuing expenses
Cost of goods sold
480,000
213,000
267,000
Direct expense
Advertising
30,000
12,500
17,500
Store supplies used
10,500
5,000
5,500
Depreciation (store equipment)
7,900
7,900
Allocated expenses
Sales salaries
124,800
46,800
78,000
Rent expense
14,240
14,240
Bad debt expenses
16,500
7,100
9,400
Office salary
31,200
31,200/ 4clerks*2 = 15,600
15,600
Insurance expenses
3,000
1,100*74% = 814
2,186
Miscellaneous office expenses
4,500
1,900*23% = 437
4,063
Total expenses
722,640
301,251
421,389
