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.

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017
	Dept. 100					Dept. 200					Combined
Sales		$	436,000				$	289,000				$	725,000
Cost of goods sold			261,000					212,000					473,000
Gross profit			175,000					77,000					252,000
Operating expenses
Direct expenses
Advertising			15,500					12,000					27,500
Store supplies used			5,000					4,600					9,600
Depreciation—Store equipment			4,800					3,800					8,600
Total direct expenses			25,300					20,400					45,700
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,450					4,730					14,180
Bad debts expense			9,800					7,900					17,700
Office salary			15,600					10,400					26,000
Insurance expense			1,900					1,200					3,100
Miscellaneous office expenses			2,100					1,400					3,500
Total allocated expenses			103,850					64,630					168,480
Total expenses			129,150					85,030					214,180
Net income (loss)		$	45,850				$	(8,030	)			$	37,820

In analyzing whether to eliminate Department 200, management considers the following:

1. The company has one office worker who earns $500 per week, or $26,000 per year, and four sales clerks who each earn $500 per week, or $26,000 per year for each salesclerk.
2. 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.
3. 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.
4. 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.
5. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 75% of the insurance expense allocated to it to cover its merchandise inventory; and 18% 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 salesclerk. ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Eliminated Continuing Expenses Expenses Expenses Direct expenses Allocated expenses Total expenses

Answer 1

Solution 1:

AK 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Elegant Decor Company Analysis of Expenses under elimination of Department 200 Particulars Total Expenses Eliminated Expenses Continuing expenses Cost of good sold $473,000.00 $210,000.00 $263,000.00 Direct Expenses: Advertising $27,500.00 $12,000.00 $15,500.00 Store supplies used $9,600.00 $4,600.00 $5,000.00 Depreciation - Store Equipment | $8,600.00 $0.00 $8,600.00 Allocated Expenses: Sales Salaries $104,000.00 $39,000.00 $65,000.00 Rent Expense $14,180.00 $0.00 $14,180.00 Bad debts expense $17,700.00 $7,900.00 $9,800.00 Office salary $ 26,000.00 $13,000.00 $13,000.00 Insurance Expense $3,100.00 $900.00 $2,200.00 Miscellaneous office expense $3,500.00 $252.00 $3,248.00 Total Expenses $687,180.00 $287,652.00 $399,528.00 24 25 27 28 29 30 31 32 36 38 39 40 41 43 44 45 46 47 48 49 et754 Sheet786 (2) ) Sheet756 Sheet759 Sheet805 (2)

Solution 2 and 3:

YAK VK 11 12 13 Elegatn Décor Company Forecasted annual income statement Under plan to eliminate Department 200 Particulars Amount Sales $436,000.00 Cost of goods sold $263,000.00 Gross Profit $173,000.00 Operating Expenses: Advertising $15,500.00 Store supplies used $5,000.00 Depreciation - Store Equipment $8,600.00 Sales Salaries $65,000.00 Rent Expense $14,180.00 Bad debts expense $9,800.00 Office salary $13,000.00 Insurance Expense $2,200.00 Miscellaneous office expense $3,248.00 Total operating expenses $136,528.00 14 16 17 18 19 20 23 Net Operating Income $36,472.00 24 25 26 Elegatn Décor Company Reconciliation of combined income with forecasted income Particulars Amount Combined Net Income $37,820.00 Add: Eliminated expenses $287,652.00 Less: Dept 200's lost sales $289,000.00 29 30 31 32 Forecasted net income $36,472.00 33 34 35 36 37 38 20 et754 Sheet786 (2) ) Sheet756 Sheet759 Sheet805 (2)