Question

Problem 10-6A Analysis of possible elimination of a department LO A1 [The following information applies to the questions displayed below.] 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 $ 448,000 $ 287,000 $ 735,000 Cost of goods sold 265,000 215,000 480,000 Gross profit 183,000 72,000 255,000 Operating expenses Direct expenses Advertising 16,000 13,000 29,000 Store supplies used 4,500 3,900 8,400 Depreciation—Store equipment 4,800 3,600 8,400 Total direct expenses 25,300 20,500 45,800 Allocated expenses Sales salaries 65,000 39,000 104,000 Rent expense 9,400 4,780 14,180 Bad debts expense 9,800 7,900 17,700 Office salary 18,720 12,480 31,200 Insurance expense 1,500 800 2,300 Miscellaneous office expenses 2,400 1,700 4,100 Total allocated expenses 106,820 66,660 173,480 Total expenses 132,120 87,160 219,280 Net income (loss) $ 50,880 $ (15,160 ) $ 35,720 ________________________________________ In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each earn $500 per week, or $26,000 per year for each salesclerk. b. 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. c. 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. d. 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. e. 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 19% of the miscellaneous office expenses presently allocated to it.

Answer 1

ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
	Total Expenses	Eliminated Expenses	Continuing Expenses
Cost of goods sold	480000	215000	265000
Direct expenses
Advertising	29,000	13,000	16000
Store supplies used	8,400	3,900	4500
Depreciation—Store equipment	8,400		8400
Allocated expenses
Sales salaries	1,04,000	39,000	65000
Rent expense	14,180		14180
Bad debts expense	17,700	7,900	9800
Office salary	31,200	15,600	15600
Insurance expense	2,300	568	1732
Miscellaneous office expenses	4,100	323	3777
Total expenses	2,19,280	80,291	1,38,989