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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				$	286,000				$	733,000
Cost of goods sold			260,000					210,000					470,000
Gross profit			187,000					76,000					263,000
Operating expenses
Direct expenses
Advertising			16,500					12,000					28,500
Store supplies used			5,500					5,100					10,600
Depreciation—Store equipment			4,600					3,600					8,200
Total direct expenses			26,600					20,700					47,300
Allocated expenses
Sales salaries			52,000					31,200					83,200
Rent expense			9,420					4,750					14,170
Bad debts expense			9,900					7,700					17,600
Office salary			15,600					10,400					26,000
Insurance expense			1,700					900					2,600
Miscellaneous office expenses			2,700					2,000					4,700
Total allocated expenses			91,320					56,950					148,270
Total expenses			117,920					77,650					195,570
Net income (loss)		$	69,080				$	(1,650	)			$	67,430

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 sales clerks who each earn $400 per week, or $20,800 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; 67% of the insurance expense allocated to it to cover its merchandise inventory; and 18% 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 Total expenses

Answer 1

Solution: