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 departmental income statements show the following. Dept. 200 $288,000 207,000 81,000 Combined $728,000 469,000 259,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. 100 Sales $440,000 Cost of goods sold 262,000 Gross profit 178,000 Operating expenses Direct expenses Advertising 15,500 Store supplies used 4,500 Depreciation-Store equipment 4,200 Total direct expenses 24,200 Allocated expenses Sales salaries 78,000 Rent expense 9,430 Bad debts expense 9,700 Office salary 18,720 Insurance expense 2,300 Miscellaneous office expenses 2,400 Total allocated expenses 120,550 Total expenses 144,750 Net income (loss) $ 33,250 11,500 4,200 2,500 18, 200 27,000 8,700 6,700 42,400 46,800 4,760 7,500 12,480 1,500 1,600 74,640 92,840 $(11,840) 124,800 14,190 17,200 31,200 3,800 4,000 195,190 237,590 $ 21,410 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 earns $600 per week, or $31,200 per year for each salesclerk. b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk 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; 74% of the insurance expense allocated to it to cover its merchandise inventory; and 19% of the miscellaneous office expenses presently allocated to it. 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 Operating expenses Total operating expenses
