Esme Company’s management is trying to decide whether to eliminate Department Z, which has pro¬ duced low profits or losses for several years. The company’s 2013 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 $500 per week or $26,000 per year and four sales¬ clerks who each earn $450 per week or $23,400 per year for each salesclerk.

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 Depart¬ ment Z is eliminated (list both items and amounts). Analyze the reconciliation and explain why you think the department should or should not be eliminated

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Sales.... Cost of goods sold Gross profit.... Operating expenses ESME COMPANY Departmental Income Statements For Year Ended December 31, 2013 Dept.A Dept. Z Combined $700,000 $175,000 $875,000 461,300 125,100 586,400 238,700 49,900 288,600 Direct expenses Advertising. 27,000 3,000 30,000 Store supplies used... 5,600 1,400 7,000 Depreciation-Store equipment 14,000 7,000 21,000 Total direct expenses.. 46,600 11,400 58,000 Allocated expenses Office salary Sales salaries Rent expense.. Bad debts expense Insurance expense. Miscellaneous office expenses 70,200 23,400 93,600 22,080 5,520 27,600 21,000 4,000 25.000 20,800 5,200 26,000 4,200 1,400 5,600 1,700 2,500 4,200 Total allocated expenses Total expenses. Net income (loss) 139,980 42,020 182,000 186.580 53,420 240,000 $ 52,120 $ (3,520) $ 48,600