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		$	449,000				$	284,000				$	733,000
Cost of goods sold			270,000					212,000					482,000
Gross profit			179,000					72,000					251,000
Operating expenses
Direct expenses
Advertising			15,500					10,500					26,000
Store supplies used			5,500					5,100					10,600
Depreciation—Store equipment			4,600					3,500					8,100
Total direct expenses			25,600					19,100					44,700
Allocated expenses
Sales salaries			78,000					46,800					124,800
Rent expense			9,470					4,720					14,190
Bad debts expense			9,500					7,300					16,800
Office salary			18,720					12,480					31,200
Insurance expense			2,500					1,800					4,300
Miscellaneous office expenses			2,600					1,800					4,400
Total allocated expenses			120,790					74,900					195,690
Total expenses			146,390					94,000					240,390
Net income (loss)		$	32,610				$	(22,000	)			$	10,610

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 $600 per week, or $31,200 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; 67% of the insurance expense allocated to it to cover its merchandise inventory; and 15% 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 Expenses Eliminated Expenses Continuing Expenses Cost of goods sold $482,000 $212,000 $270,000 Direct expenses Advertising 26,000 10,500 15,500 Store supplies used 10,600 5,100 5,500 Depreciation—Store equipment 8,100 8,100 Allocated expenses Sales salaries 124,800 Rent expense 14,190 14,190 Bad debts expense 16,800 7,300 9,500 Office salary Insurance expense 4,300 Miscellaneous office expenses 4,400 Total expenses $691,190 $234,900 $322,790

2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales $449,000 Cost of goods sold (270,000) Gross profit from sales 179,000 Operating expenses Advertising 15,500 Store supplies used Depreciation of store equipment 8,100 Sales salaries Rent expense 14,190 Bad debts expense 9,500 Office salary Insurance expense Miscellaneous office expenses Total operating expenses 47,290 Net income $131,710

Answer 1

1			Elegant Décor Company
		Analysis of Expenses under Elimination of Department 200
				Total Expenses	Eliminated expenses	Continuing Expenses
		Cost of Goods Sold		482000	212000	270000
		Direct Expenses
		Advertising		26000	10500	15500
		Store Supplies used		10600	5100	5500
		Depreciation - Store Equipment		8100	0	8100
		Allocated expenses
		Sales salaries		124800	46800	78000	Sales salary would be eliminated
		Rent expenses		14190	0	14190
		Bad debt expenses		16800	7300	9500
		Office Salary		31200	15600	15600
		Insurance expense		4300	2881	1419	4300*67%
		Miscellaneous office expense		4400	660	3740	4400*15%
		Total expenses		722390	300841	421549
2		ELEGANT DECOR COMPANY
		Forecasted Annual Income Statement
		Under Plan to Eliminate Department 200
		Sales	$449,000
		Cost of goods sold	-270,000
		Gross profit from sales	179,000
		Operating expenses
		Advertising	15,500
		Store supplies used	5500
		Depreciation of store equipment	8,100
		Sales salaries	78000
		Rent expense	14,190
		Bad debts expense	9,500
		Office salary	15600
		Insurance expense	1419
		Miscellaneous office expenses	3740
		Total operating expenses	151,549
		Net income	$27,451