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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		$	440,000				$	286,000				$	726,000
Cost of goods sold			267,000					210,000					477,000
Gross profit			173,000					76,000					249,000
Operating expenses
Direct expenses
Advertising			16,500					12,000					28,500
Store supplies used			4,500					4,000					8,500
Depreciation—Store equipment			4,800					3,400					8,200
Total direct expenses			25,800					19,400					45,200
Allocated expenses
Sales salaries			78,000					46,800					124,800
Rent expense			9,500					4,740					14,240
Bad debts expense			9,600					7,700					17,300
Office salary			18,720					12,480					31,200
Insurance expense			2,100					1,200					3,300
Miscellaneous office expenses			2,700					1,900					4,600
Total allocated expenses			120,620					74,820					195,440
Total expenses			146,420					94,220					240,640
Net income (loss)		$	26,580				$	(18,220	)			$	8,360

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 $600 per week, or $31,200 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; 72% of the insurance expense allocated to it to cover its merchandise inventory; and 19% of the miscellaneous office expenses presently allocated to it.

	ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Cost of goods sold Direct expenses Advertising Store supplies used Depreciation—Store equipment Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total expenses $0 $0 $0

Answer 1

ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
	Total Expenses	Eliminated Expenses	Continuing Expenses
Cost of goods sold	477,000.00	210,000.00	267,000.00
Direct expenses
Advertising	28,500.00	12,000.00	16,500.00
Store supplies used	8,500.00	4,000.00	4,500.00
Depreciation—Store equipment	8,200.00		8,200.00
Allocated expenses
Sales salaries	124,800.00	46,800.00	78,000.00
Rent expense	14,240.00		14,240.00
Bad debts expense	17,300.00	7,700.00	9,600.00
Office salary	31,200.00	15,600.00	15,600.00
Insurance expense	3,300.00	864.00	2,436.00
Miscellaneous office expenses	4,600.00	361.00	4,239.00
Total expenses	717,640.00	297,325.00	420,315.00