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		$	436,000				$	285,000				$	721,000
Cost of goods sold			264,000					211,000					475,000
Gross profit			172,000					74,000					246,000
Operating expenses
Direct expenses
Advertising			17,500					13,500					31,000
Store supplies used			5,500					4,900					10,400
Depreciation—Store equipment			4,000					2,600					6,600
Total direct expenses			27,000					21,000					48,000
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,440					4,710					14,150
Bad debts expense			9,600					7,800					17,400
Office salary			18,720					12,480					31,200
Insurance expense			2,100					1,200					3,300
Miscellaneous office expenses			2,800					2,200					5,000
Total allocated expenses			107,660					67,390					175,050
Total expenses			134,660					88,390					223,050
Net income (loss)		$	37,340				$	(14,390	)			$	22,950

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 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 24% 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.

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.

3. Should Department 200 be eliminated?

Answer 1

Solution 1:

Elegant Decor Company
Analysis of Expenses under elimination of Department 200
Particulars	Total Expenses	Eliminated Expenses	Continuing expenses
Cost of good sold	$475,000.00	$211,000.00	$264,000.00
Direct Expenses:
Advertising	$31,000.00	$13,500.00	$17,500.00
Store supplies used	$10,400.00	$4,900.00	$5,500.00
Deprectiation - Store Equipment	$6,600.00	$0.00	$6,600.00
Allocated Expenses:
Sales Salaries	$104,000.00	$36,400.00	$67,600.00
Rent Expense	$14,150.00	$0.00	$14,150.00
Bad debts expense	$17,400.00	$7,800.00	$9,600.00
Office salary	$31,200.00	$15,600.00	$15,600.00
Insurance Expense	$3,300.00	$840.00	$2,460.00
Miscellenous office expense	$5,000.00	$528.00	$4,472.00
Total Expenses	$698,050.00	$290,568.00	$407,482.00

Solution 2:

Elegatn Décor Company
Forecasted annual income statement
Under plan to eliminate Department 200
Particulars	Amount
Sales	$436,000.00
Cost of goods sold	$264,000.00
Gross Profit	$172,000.00
Operating Expenses:
Advertising	$17,500.00
Store supplies used	$5,500.00
Deprectiation - Store Equipment	$6,600.00
Sales Salaries	$67,600.00
Rent Expense	$14,150.00
Bad debts expense	$9,600.00
Office salary	$15,600.00
Insurance Expense	$2,460.00
Miscellenous office expense	$4,472.00
Total operating expenses	$143,482.00
Net Operating Income	$28,518.00

Solution 3:

Elegant Décor Company
Reconciliation of combined income with forecasted income
Particulars	Amount
Combined Net Income	$22,950.00
Add: Dept 200's eliminated expenses	$290,568.00
Less: Dept 200's lost sales	-$285,000.00
Forecasted net income	$28,518.00