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 2015 departmental income statements shows the following ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2015 Dept. 100 261,000 177,000 Combined 725,000 470,000 Dept. 200 Sales Cost of goods sold $438,000 287000 209,000 Gross profit Operating expenses 78,000 255,000 Direct expenses Advertising Store supplies used Depreciation-Store equipment 17,500 5,000 4,600 13,000 4,500 3,400 30,500 9,500 8,000 Total direct expenses 27100 20,900 48,000 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses 65,000 9,430 9,900 21,840 1,900 2,200 39,000 4,750 7,700 14,560 1,100 1,500 104,000 14,180 17,600 36,400 3,000 3,700 Total allocated expenses 68,610 178,880 226,880 $ 39,630 $(11,510) $28,120 110,270 Total expenses 137,370 89,510 Net income (loss) n analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $700 per week, or $36,400 per year, and four sales clerks b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is who each earn $500 per week, or $26,000 per year for each salesclerk 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, 74% of the insurance expense allocated to it to cover its merchandise inventory, and 21% of the miscellaneous office expenses presently allocated to it. Required: 1. Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk. ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Eliminated Continuing Expenses ExpensesExpenses Cost of goods sold Direct expenses Advertising Store supplies used Depreciation-Store equipment Allocated expense:s Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total expenses 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. ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales Cost of goods sold Gross profit from sales Operating expenses 0 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 0 Net income Analysis Component 3. Reconcile the company's combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.) ELEGANT DECOR COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income Add: Dept 200's eliminated expenses Less: Dept. 200's lost sales Forecasted net income