Elegant Decor Company’s management is trying to decide whether to eliminate Depa
ID: 2806004 • 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 show 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 $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; 72% of the insurance expense allocated to it to cover its merchandise inventory, and 24% 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 a salesclerk.
Departmental Income Statements
For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined Sales $ 441,000 $ 289,000 $ 730,000 Cost of goods sold 264,000 212,000 476,000 Gross profit 177,000 77,000 254,000 Operating expenses Direct expenses Advertising 16,000 12,500 28,500 Store supplies used 4,500 3,900 8,400 Depreciation—Store equipment 4,200 3,000 7,200 Total direct expenses 24,700 19,400 44,100 Allocated expenses Sales salaries 65,000 39,000 104,000 Rent expense 9,470 4,770 14,240 Bad debts expense 9,600 7,600 17,200 Office salary 18,720 12,480 31,200 Insurance expense 2,100 1,300 3,400 Miscellaneous office expenses 2,700 2,100 4,800 Total allocated expenses 107,590 67,250 174,840 Total expenses 132,290 86,650 218,940 Net income (loss) $ 44,710 $ (9,650 ) $ 35,060
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 $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; 72% of the insurance expense allocated to it to cover its merchandise inventory, and 24% 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 a salesclerk.
Explanation / Answer
ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Direct expenses Advertising 28500 12500 16000 Store supplies used 8400 3900 4500 Depreciation-Store equipment 7200 0 7200 Allocated expenses 44100 16400 27700 Sales salaries 104000 36400 67600 Rent expense 14240 0 14240 Bad debts expense 17200 7600 9600 Office salary 31200 15600 15600 Insurance expense 3400 936 2464 Miscellaneous office expense 4800 504 4296 Total allocated expenses 174840 61040 113800 Total expenses 218940 77440 141500
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