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Problem 23-6A Analysis of possible elimination of a department LO A1

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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		$	447,000				$	281,000				$	728,000
Cost of goods sold			269,000					210,000					479,000
Gross profit			178,000					71,000					249,000
Operating expenses
Direct expenses
Advertising			16,000					11,500					27,500
Store supplies used			5,500					5,200					10,700
Depreciation—Store equipment			4,600					3,100					7,700
Total direct expenses			26,100					19,800					45,900
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,470					4,720					14,190
Bad debts expense			9,700					7,500					17,200
Office salary			18,720					12,480					31,200
Insurance expense			2,300					1,500					3,800
Miscellaneous office expenses			2,400					1,800					4,200
Total allocated expenses			107,590					67,000					174,590
Total expenses			133,690					86,800					220,490
Net income (loss)		$	44,310				$	(15,800	)			$	28,510

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 $500 per week, or $26,000 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; 66% of the insurance expense allocated to it to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to it.

Problem 23-6A Part 1

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

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Analysis of Expenses under Elimination of Department 200
			Total Expense	Eliminated Expnese	Continuing Expense
Cost of Goods Sold			$         479,000	$                    210,000	$                     269,000
Direct Expenses:
Advertising			$           27,500	$                       11,500	$                       16,000
Store supplies used			$           10,700	$                         5,200	$                         5,500
Depreciation—Store equipment			$             7,700		$                         7,700
Allocated expenses:
Sales salaries	52000 will be eliminated,15600(31200/2) will be reclassed to Sale from Office		$         104,000	$                       39,000	$                       65,000
Rent expense			$           14,190		$                       14,190
Bad debts expense			$           17,200	$                         7,500	$                         9,700
Office salary	31200/2		$           31,200	$                               -	$                       31,200
Insurance expense	1500*66%		$             3,800	$                            990	$                         2,810
Miscellaneous office expenses	1800*24%		$             4,200	$                            432	$                         3,768
Total Expenses			$         699,490	$                    274,622	$                     424,868