Kumar Company€™s management is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company€™s 2009 departmental income statement shows the following.

In analyzing whether to eliminate Department Z, management considers the following items:
a. The company has one office worker who earns $750 per week or $39,000 per year and four salesclerks who each earn $675 per week or $35,100 per year.
b. The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.
c. Eliminating Department Z 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 two remaining clerks if the one office worker works in sales half time. Eliminating Department Z 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 A will use the space and equipment currently used by Department Z.
e. Closing Department Z will eliminate its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.
Required
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 Z€”in column 2, and (c) the expenses that will continue€”in column 3.
2. Prepare a forecasted annual income statement for the company reflecting the elimination of
Department Z assuming that it will not affect Department A€™s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.
Analysis Component
3. Reconcile the company€™s combined net income with the forecasted net income assuming that
Department Z is eliminated (list both items and amounts). Analyze the reconciliation and explain why you think the department should or should not beeliminated.

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KUMAR COMPANY For Year Ended December 31, 2009 Dept. A Dept. Z Combined Cost of goods sold 691,950 187,650 Gross proft. Operating expenses 879.600 432,900 358,050 74.850 Direct expenses Advertising .. Store supples used Depr Total direct expenses 45.000 0,500 31,500 87.000 .. 40,500 8,400 21,000 69.900 2,100 0.500 17.100 eclation-Store equipment Allocated expenses l40.400 41.400 37.500 39.000 8.400 6,300 273.000 360.000 6.000 7.800 2,100 3.750 209.970 63.050 Total expenses *279.870 80.130 Rent expense ....- Bad debts expense . Office salary 33.120 31.500 31.200 6.300 2,550 Total allocated expenses