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		$	445,000				$	289,000				$	734,000
Cost of goods sold			264,000					213,000					477,000
Gross profit			181,000					76,000					257,000
Operating expenses
Direct expenses
Advertising			16,000					12,000					28,000
Store supplies used			4,500					4,100					8,600
Depreciation—Store equipment			4,800					3,600					8,400
Total direct expenses			25,300					19,700					45,000
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,400					4,750					14,150
Bad debts expense			9,500					7,500					17,000
Office salary			18,720					12,480					31,200
Insurance expense			1,700					900					2,600
Miscellaneous office expenses			2,400					1,700					4,100
Total allocated expenses			106,720					66,330					173,050
Total expenses			132,020					86,030					218,050
Net income (loss)		$	48,980				$	(10,030	)			$	38,950

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 $500 per week, or $26,000 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; 68% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

Answer 1

Solution 1:

H 8 Elegant Decor Company | Analysis of Expenses under elimination of Department 200 Particulars Total Expenses Eliminated Expenses Continuing expenses 7 Cost of good sold $477,000.00 $213,000.00 $264,000.00 Direct Expenses: 9 Advertising $28,000.00 $12,000.00 $16,000.00 10 Store supplies used $8,600.00 $4,100.00 $4,500.00 11 Depreciation - Store Equipment $8,400.00 $0.00 $8,400.00 12 Allocated Expenses: 13 Sales Salaries $104,000.00 $36,400.00 $67,600.00 14 Rent Expense $14,150.00 $0.00 $14,150.00 15 Bad debts expense $17,000.00 $7,500.00 $9,500.00 16 Office salary $31,200.00 $15,600.00 $15,600.00 17 Insurance Expense $2,600.00 $612.00 $1,988.00 18 Miscellaneous office expense $4,100.00 $425.00 $3,675.00 19 20 Total Expenses $695,050.00 $289,637.00 $405,413.00 21 22 23 24 25 26 27 29 36 43 44 45 et754 Sheet786 (2) ) Sheet756 Sheet759 Sheet805 (2)

Solution 2 and 3:

AR 11 12 13 14 Elegatn Décor Company Forecasted annual income statement Under plan to eliminate Department 200 Particulars Amount Sales $445,000.00 Cost of goods sold $264,000.00 Gross Profit $181,000.00 Operating Expenses: Advertising $ 16,000.00 Store supplies used $4,500.00 Depreciation - Store Equipment $8,400.00 Sales Salaries $67,600.00 Rent Expense $14,150.00 Bad debts expense $9,500.00 Office salary $15,600.00 Insurance Expense $1,988.00 Miscellaneous office expense $3,675.00 Total operating expenses $141,413.00 17 18 19 22 23 Net Operating Income $39,587.00 24 25 26 27 Elegatn Décor Company Reconciliation of combined income with forecasted income Particulars Amount Combined Net Income $38,950.00 Add: Eliminated expenses $289,637.00 Less: Dept 200's lost sales $289,000.00 28 29 30 31 32 Forecasted net income $39,587.00 33 34 35 36 38 39 40 et754 Sheet786 (2) ) Sheet756 Sheet759 Sheet805 (2)