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Elegant Decor Company’s management is trying to decide whether
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Problem 10-6A Part 1

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.

   

     

 

Problem 10-6A Analysis of possible elimination of a department LO A1

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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 2015 departmental income statements show the following.

  

ELEGANT DECOR COMPANY
Departmental Income Statements
For Year Ended December 31, 2015
  Dept. 100 Dept. 200 Combined
  Sales   $ 436,000       $ 290,000       $ 726,000  
  Cost of goods sold     262,000         207,000         469,000  
               
  Gross profit     174,000         83,000         257,000  
  Operating expenses                            
    Direct expenses                            
       Advertising     17,000         12,000         29,000  
       Store supplies used     4,000         3,800         7,800  
       Depreciation—Store equipment     5,000         3,300         8,300  
               
       Total direct expenses     26,000         19,100         45,100  
    Allocated expenses                            
       Sales salaries     65,000         39,000         104,000  
       Rent expense     9,440         4,720         14,160  
       Bad debts expense     9,900         8,100         18,000  
       Office salary     18,720         12,480         31,200  
       Insurance expense     2,000         1,100         3,100  
       Miscellaneous office expenses     2,400         1,600         4,000  
               
       Total allocated expenses     107,460         67,000         174,460  
               
  Total expenses     133,460         86,100         219,560  
               
  Net income (loss)   $ 40,540       $ (3,100 )     $ 37,440  
               

   
 

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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% 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.

 

Problem 10-6A Part 2

2.

Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

Problem 10-6A Part 3

Analysis Component
3.

Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.)

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