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 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		$	437,000				$	288,000				$	725,000
Cost of goods sold			261,000					212,000					473,000
Gross profit			176,000					76,000					252,000
Operating expenses
Direct expenses
Advertising			18,000					14,000					32,000
Store supplies used			4,500					4,000					8,500
Depreciation—Store equipment			5,000					3,900					8,900
Total direct expenses			27,500					21,900					49,400
Allocated expenses
Sales salaries			78,000					46,800					124,800
Rent expense			9,420					4,770					14,190
Bad debts expense			9,400					7,300					16,700
Office salary			21,840					14,560					36,400
Insurance expense			1,500					600					2,100
Miscellaneous office expenses			2,700					2,100					4,800
Total allocated expenses			122,860					76,130					198,990
Total expenses			150,360					98,030					248,390
Net income (loss)		$	25,640				$	(22,030	)			$	3,610

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

The company has one office worker who earns $700 per week, or $36,400 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; 71% of the insurance expense allocated to it to cover its merchandise inventory; and 22% 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.

Elegant Decor Company (Analysis of expenses under elimination of department 200)

	Total Expenses	Eliminated Expenses	Continuing Expenses
Direct Expenses
Allocated Expenses

Answer 1

ELEGANTDÉCORCOMPANY
Analysis of expenses under Elimination Department200
Particular	Total Expence	Eleminated Expences	Continuing Expences
Direct Expenses
Advertising	$32,000	$14,000	$18,000
Store supplies used	$8,500	$4,000	$4,500
Depriciation - Store Equipment	$8,900	$0	$8,900
Allocated expenses			$0
Sales salaries**	$124,800	$46,800	$78,000
Rent Expense	$14,190	$4,770	$9,420
Bad debts expenses	$16,700	$7,300	$9,400
Office salary***	$36,400	$18,200	$18,200
Insurance expense****	$2,100	$1,428	$672
Miscellaneous office expences*****	$4,800	$1,680	$3,120
Total expenses	$248,390	$98,178	$150,212

**Sales Salaries= ($124800-($31200*2)+15600))=46800

*** Office Salary:- ($36400-(36400/2)=18200

****Insurance Expense= (68%*2100)=$1428

*****Misc. Expense= (22%*4800)=$1056