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 2017 departmental income statements show the following. 262,000 20 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined Sales $436,000 $290,000 $726,000 Cost of goods 207,000 469,000 sold Gross profit 174,000 83,000 257,000 Operating expenses Direct expenses Advertising 17,000 12,000 29,000 Store 4,000 3,800 7,800 supplies used Depreciation, Store 5,000 3,300 8,300 equipment Total direct 26,000 19,100 45,100 expenses Allocated expenses Sales 65,000 39,000 104,000 salaries Rent expense 9,440 4,720 14,160 Bad debts 9,900 8,100 18,000 expense Office salary 18,720 12,480 31,200 Insurance 2,000 1,100 3,100 expense Miscellaneous office 2,400 1,600 4,000 expenses Total allocated 107,460 67,000 174,460 expenses Total expenses 133,460 86,100 219,560 Net income $ 40,540 $ (3,100) $ 37,440 (loss) 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 sales clerks who each earn $500 per week, or $26,000 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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it. Problem 10-6A Part 1 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 Expenses Expenses Cost of goods sold $ 469,000 $ 207,000 $ 262,000 Direct expenses Advertising o 29,000 12,000 17,000 Store supplies 7,800 3,800 4,000 used Depreciation- 8,300 8,300 Store equipment Allocated expenses Sales salaries 104,000 52,000 52,000x Rent expense 14,160 14,161 Bad debts 18,000 8,100 9,900 expense Office salary 31,200 31,200X Insurance 3,100 770 2,330 expense Miscellaneous 4,000 400 3,600 office expenses Total expenses $ 688,560 $ 284,070 $ 404,490