Question

Required information [The following information applies to the questions displayed below.] 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 $ 289,000 $ 729,000 Cost of goods sold 265,000 213,000 478,000 Gross profit 175,000 76,000 251,000 Operating expenses Direct expenses Advertising 16,500 13,000 29,500 Store supplies used 5,000 4,600 9,600 Depreciation—Store equipment 4,800 3,100 7,900 Total direct expenses 26,300 20,700 47,000 Allocated expenses Sales salaries 78,000 46,800 124,800 Rent expense 9,410 4,780 14,190 Bad debts expense 9,900 7,500 17,400 Office salary 15,600 10,400 26,000 Insurance expense 2,100 1,300 3,400 Miscellaneous office expenses 2,100 1,400 3,500 Total allocated expenses 117,110 72,180 189,290 Total expenses 143,410 92,880 236,290 Net income (loss) $ 31,590 $ (16,880 ) $ 14,710 In analyzing whether to eliminate Department 200, management considers the following: The company has one office worker who earns $500 per week, or $26,000 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; 75% of the insurance expense allocated to it to cover its merchandise inventory; and 21% 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

		ELEGANT DECOR COMPANY
				Total expenses	Eliminated expenses	Continuing expenses
Cost of goods sold				478000	213000	265000
Direct expenses :
Advertising				29500	13000	16500
Store supplies used				9600	4600	5000
Depreciation—Store equipment			(Note:1)	7900	0	7900
Allocated expenses:
Sales salaries				124800	46800	78000
Rent expense			(Note:2)	14190	0	14190
Bad debts expense				17400	7500	9900
Office salary			(Note:3)	26000	13000	13000
Insurance expense				3400	975	2425
					(1300*75%)
Miscellaneous office expenses				3500	294	3206
					(1400*21%)
Total expenses				714290	299169	415121
Notes
1. Depreciation expenses will continue to incur even if the department is closed.
2. Department 100 will use the space and equipment currently used by Department 200.Hence, total rent expense will continue
3. half the office worker’s salary would be reported as sales salaries and half would be reported as office salary
Office salary=26000*1/2=$ 13000