Question

Acme Manufacturing is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company’s departmental income statements show the following:

	A	Z	Total
Sales	$700,000	$175,000	$875,000
Cost of goods sold	461,300	125,100	586,400
Gross profit	238,700	49,900	288,600
Operating expenses
Direct expenses
Advertising	27,000	3,000	30,000
Store supplies used	5,600	1,400	7,000
Depreciation – store equipment	14,000	7,000	21,000
Total direct expenses	46,000	11,400	58,000
Allocated expenses
Sales salaries	70,200	23,400	93,600
Rent expense	22,080	5,520	27,600
Bad debts expense	21,000	4,000	25,000
Office salary	20,800	5,200	26,000
Insurance expense	4,200	1,400	5,600
Miscellaneous office expense	1,700	2,500	4,200
Total allocated expenses	139,980	42,020	182,000
Total expenses	186,580	53,420	240,000
Net income (loss)	$ 52,120	$ (3,520)	$ 48,600

The plant controller provided the following additional information:

• The company has one office worker who earns $500 per week, or $26,000 per years, and four salesclerks who each earns $450 per week, or $23,400 per year for each salesclerk.
• The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.
• Eliminating Department Z would avoid the sales salaries but not the office salary currently allocated to it.
• The store building is rented under a long-term lease that cannot be changed. Therefore, Department A will use the space and equipment currently utilized by Department Z.
• Closing Department Z will eliminated its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.

Required

Should Acme Manufacturing eliminate product Z? Show detailed calculations to support your decision.

Answer 1