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.

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017
	Dept. 100					Dept. 200					Combined
Sales		$	436,000				$	290,000				$	726,000
Cost of goods sold			262,000					207,000					469,000
Gross profit			174,000					83,000					257,000
Operating expenses
Direct expenses
Advertising			17,000					12,000					29,000
Store supplies used			4,000					3,800					7,800
Depreciation—Store equipment			5,000					3,300					8,300
Total direct expenses			26,000					19,100					45,100
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,440					4,720					14,160
Bad debts expense			9,900					8,100					18,000
Office salary			18,720					12,480					31,200
Insurance expense			2,000					1,100					3,100
Miscellaneous office expenses			2,400					1,600					4,000
Total allocated expenses			107,460					67,000					174,460
Total expenses			133,460					86,100					219,560
Net income (loss)		$	40,540				$	(3,100	)			$	37,440

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

1. 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.
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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% 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

Answer 1

Solution 1:

Elegant Decor Company
Analysis of Expenses under elimination of Department 200
Particulars	Total Expenses	Eliminated Expenses	Continuing expenses
Cost of good sold	$469,000.00	$207,000.00	$262,000.00
Direct Expenses:
Advertising	$29,000.00	$12,000.00	$17,000.00
Store supplies used	$7,800.00	$3,800.00	$4,000.00
Deprectiation - Store Equipment	$8,300.00	$0.00	$8,300.00
Allocated Expenses:
Sales Salaries	$104,000.00	$36,400.00	$67,600.00
Rent Expense	$14,160.00	$0.00	$14,160.00
Bad debts expense	$18,000.00	$8,100.00	$9,900.00
Office salary	$31,200.00	$15,600.00	$15,600.00
Insurance Expense	$3,100.00	$770.00	$2,330.00
Miscellenous office expense	$4,000.00	$400.00	$3,600.00
Total Expenses	$688,560.00	$284,070.00	$404,490.00