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 departmental income statements show the following.

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019
	Dept. 100					Dept. 200					Combined
Sales		$	442,000				$	283,000				$	725,000
Cost of goods sold			267,000					213,000					480,000
Gross profit			175,000					70,000					245,000
Operating expenses
Direct expenses
Advertising			15,000					11,500					26,500
Store supplies used			4,500					4,000					8,500
Depreciation—Store equipment			5,000					4,000					9,000
Total direct expenses			24,500					19,500					44,000
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,420					4,790					14,210
Bad debts expense			9,800					7,900					17,700
Office salary			15,600					10,400					26,000
Insurance expense			1,700					900					2,600
Miscellaneous office expenses			2,500					1,800					4,300
Total allocated expenses			104,020					64,790					168,810
Total expenses			128,520					84,290					212,810
Net income (loss)		$	46,480				$	(14,290	)			$	32,190

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

1. The company has one office worker who earns $500 per week, or $26,000 per year, and four salesclerks who each earns $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 23% of the miscellaneous office expenses presently allocated to it

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 Direct expenses Allocated expenses Total expenses

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 Operating expenses Total operating expenses

Answer 1

1.

ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
	Total Expenses	Eliminated Expenses	Continuing Expenses
Cost of goods sold	480,000.00	213,000.00	267,000.00
Direct expenses
Advertising	26,500.00	11,500.00	15,000.00
Store supplies used	8,500.00	4,000.00	4,500.00
Depreciation—Store equipment	9,000.00	-	9,000.00
Allocated expenses	-	-	-
Sales salaries	104,000.00	39,000.00	65,000.00
Rent expense	14,210.00		14,210.00
Bad debts expense	17,700.00	7,900.00	9,800.00
Office salary	26,000.00	13,000.00	13,000.00
Insurance expense	2,600.00	630.00	1,970.00
Miscellaneous office expenses	4,300.00	414.00	3,886.00
Total expenses	692,810.00	289,444.00	403,366.00

2.

ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales	442,000.00
Cost of Goods Sold	267,000.00
Gross Profit	175,000.00
Operating Expenses :
Advertising	15,000.00
Store supplies used	4,500.00
Depreciation—Store equipment	9,000.00
Sales salaries	65,000.00
Rent expense	14,210.00
Bad debts expense	9,800.00
Office salary	13,000.00
Insurance expense	1,970.00
Miscellaneous office expenses	3,886.00
Total Operating Expenses	136,366.00
Net Operating iNcome	38,634.00