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    Question 2: Problem 10-6A: Analysis of possible elimination of a department L.O. C1, A1

    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 2008 departmental income statement shows the following.

    ELEGANT DECOR COMPANY
    Departmental Income Statements
    For Year Ended December 31, 2008
    Dept. 100 Dept. 200 Combined
    Sales $ 473,000 $ 296,900 $ 769,900
    Cost of goods sold 264,000 208,300 472,300
    Gross profit 209,000 88,600 297,600
    Operating expenses
    Direct expenses
    Advertising 15,000 10,000 25,000
    Store supplies used 4,400 4,200 8,600
    Depreciation?Store equipment 5,000 3,300 8,300
    Total direct expenses 24,400 17,500 41,900
    Allocated expenses
    Sales salaries 63,700 38,220 101,920
    Rent expense 9,480 4,720 14,200
    Bad debts expense 9,500 7,700 17,200
    Office salary 18,720 12,480 31,200
    Insurance expense 1,600 700 2,300
    Miscellaneous office expenses 1,500 700 2,200
    Total allocated expenses 104,500 64,520 169,020
    Total expenses 128,900 82,020 210,920
    Net income (loss) $ 80,100 $ 6,580 $ 86,680

    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 salesclerks who
    each earn $490 per week, or $25,480 per year.
    b. The full salaries of two salesclerks are charged to Department 100. The full salary of one sales clerk 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.

    Requirement 1:
    Prepare a three-column report that lists items and amounts for (a) the company's total expenses (including cost of
    goods sold)?in column 1, (b) the expenses that would be eliminated by closing Department 200?in column 2, and
    (c) the expenses that will continue?in column 3. (Leave no cells blank - be certain to enter "0" wherever
    required. Omit the "$" sign in your response.)

    ELEGANT DECOR COMPANY
    Analysis of Expenses under Elimination of Department 200
    Total
    Expenses
    Eliminated
    Expenses
    Continuing
    Expenses
    Cost of goods sold $ $ $
    Direct expenses
    Advertising
    Store supplies used
    Depreciation?Store equipment
    Allocated expenses
    Sales salaries
    Rent expense
    Bad debts expense
    Office salary
    Insurance expense
    Miscellaneous office expenses
    Total expenses $ $ $
    Requirement 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. (Omit the "$" sign in your response.)

    ELEGANT DECOR COMPANY
    Forecasted Annual Income Statement
    Under Plan to Eliminate Department 200
    Sales $
    Cost of goods sold
    Gross profit from sales
    Operating expenses
    Advertising
    Store supplies used
    Depreciation of store equipment
    Sales salaries
    Rent expense
    Bad debts expense
    Office salary
    Insurance expense
    Miscellaneous office expenses
    Total operating expenses
    Net income $
    Analysis Component
    Requirement 3:
    Reconcile the company's combined net income with the forecasted net income assuming that Department 200 is
    eliminated (list both items and amounts). (Omit the "$" sign in your response. Amounts in parentheses do not
    require a minus sign.)

    ELEGANT DECOR COMPANY
    Reconciliation of Combined Income with Forecasted Income
    Combined net income $
    Dept. 200's lost sales ( )
    Dept. 200's eliminated expenses
    Forecasted net income $

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    Problem 10-6A: Analysis of possible elimination of a department L.O. C1, A1
    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 2008 departmental income statement shows the following.

    ELEGANT DECOR COMPANY
    Departmental Income Statements
    For Year Ended December 31, 2008

    Dept. 100 Dept. 200 Combined

    Sales $ 473,000 $ 296,900 $ 769,900
    Cost of goods sold 264,000 208,300 472,300
    Gross profit 209,000 88,600 297,600
    Operating expenses
    Direct expenses
    Advertising 15,000 10,000 25,000
    Store supplies used 4,400 4,200 8,600
    Depreciation?Store equipment 5,000 3,300 8,300
    Total direct expenses 24,400 17,500 41,900
    Allocated expenses
    Sales salaries 63,700 38,220 101,920
    Rent expense 9,480 4,720 14,200
    Bad debts expense 9,500 7,700 17,200
    Office salary 18,720 12,480 31,200
    Insurance expense 1,600 700 2,300
    Miscellaneous office expenses 1,500 700 2,200
    Total allocated expenses 104,500 64,520 169,020
    Total expenses 128,900 82,020 210,920
    Net income (loss) ...

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