Elegant Decor Co: Analysis of possible elimination of a depa

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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 $