Question

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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		$	442,000				$	288,000				$	730,000
Cost of goods sold			269,000					214,000					483,000
Gross profit			173,000					74,000					247,000
Operating expenses
Direct expenses
Advertising			15,000					12,000					27,000
Store supplies used			5,500					4,900					10,400
Depreciation—Store equipment			4,600					3,200					7,800
Total direct expenses			25,100					20,100					45,200
Allocated expenses
Sales salaries			78,000					46,800					124,800
Rent expense			9,450					4,740					14,190
Bad debts expense			9,400					7,400					16,800
Office salary			18,720					12,480					31,200
Insurance expense			2,300					1,600					3,900
Miscellaneous office expenses			2,000					1,400					3,400
Total allocated expenses			119,870					74,420					194,290
Total expenses			144,970					94,520					239,490
Net income (loss)		$	28,030				$	(20,520	)			$	7,510

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

The company has one office worker who earns $600 per week, or $31,200 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; 74% 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
Total expenses

Answer 1

Solution:

Elegant Decor Company
Analysis of Expenses under elimination of Department 200
Particulars	Total Expenses	Eliminated Expenses	Continuing expenses
Cost of good sold	$4,83,000.00	$2,14,000.00	$2,69,000.00
Direct Expenses:
Advertising	$27,000.00	$12,000.00	$15,000.00
Store supplies used	$10,400.00	$4,900.00	$5,500.00
Depreciation - Store Equipment	$7,800.00	$0.00	$7,800.00
Allocated Expenses:
Sales Salaries	$1,24,800.00	$46,800.00	$78,000.00
Rent Expense	$14,190.00	$0.00	$14,190.00
Bad debts expense	$16,800.00	$7,400.00	$9,400.00
Office salary	$31,200.00	$15,600.00	$15,600.00
Insurance Expense	$3,900.00	$1,184.00	$2,716.00
Miscellaneous office expense	$3,400.00	$308.00	$3,092.00
Total Expenses	$7,22,490.00	$3,02,192.00	$4,20,298.00