Universal Solar Ltd operates three departments — a lighting department, a water heating department, and an equipment department. The store’s accountant has prepared a statement of financial performance by department for the year ended 30 June 2025 and, for the third year in a row, the equipment department has shown a loss.

If the company decides to shut down the unprofitable department, 30% of the space occupied by the equipment department will be used by the lighting department and 30% will be used by the water heating department. The other 40% of the space will no longer be rented by Universal Solar Ltd. The company does not believe that eliminating the equipment department and at the same time enlarging the remaining two departments will change the sales or gross profits of the lighting and water heating departments.

The accountant has also provided the following information.

1. At present, there are three salespeople and a manager in the equipment department. If the department is eliminated, the manager would be transferred to the lighting department and the three salespeople’s employment would be terminated. The manager’s salary is $52 000 per year.

2. Electricity, rent and insurance are allocated on the basis of floor space. The insurance would decrease $4000 a year if the department is eliminated; the rent and electricity would decrease by 40% of equipment department expense in line with the area given up.

3. Indirect advertising expenses of $60 000 were allocated to the departments on the basis of sales. The direct advertising expenditures incurred by the equipment department would be eliminated.

4. The equipment in the equipment department would be transferred to the other departments — 40% to the lighting department and 20% to the water heating department and the other 40% would be scrapped.

5. The managing director’s salary of $60 000 p.a. has been allocated equally over the departments.

Required

(a) Should the equipment department be closed down? What would be the impact on company total profit if it is eliminated?

(b) Prepare a departmental income statement that would result if the equipment department is dropped.

Transcribed Image Text:

UNIVERSAL SOLAR LTD Statement of financial performance for the year ended 30 June 2025 Water heating Lighting Equipment Income Sales $ 766 000 $ 459 600 $ 306 400 Total $ 1 532 000 Less: Cost of 306 400 206 820 107 240 620 460 sales Gross profit 459 600 252 780 199 160 911 540 Expenses Salaries Electricity 144 990 74 410 80 950 300 350 14 700 14 700 12 600 42 000 Advertising 126 280 78 470 86 590 291 340 Rent on building Depreciation on equipment Insurance Total expenses Profit (loss) 28 700 28 700 24 600 82.000 31 570 23 450 19 840 74 860 9555 9555 8 190 355 795 229 285 232 770 27 300 817 850 $ 103 805 $ 23 495 $ (33 610) $ 93 690