Question
Part 1 Analysis of Expenses under Elimination of Department X Total Eliminated Continuing Expenses Expenses Expenses Cost of goods sold............................... $ 938,000 $414,000 $524,000 Direct
Part 1
| |||
Analysis of Expenses under Elimination of Department X | |||
| Total | Eliminated | Continuing |
| Expenses | Expenses | Expenses |
Cost of goods sold............................... | $ 938,000 | $414,000 | $524,000 |
Direct expenses |
|
|
|
Advertising......................................... | 58,000 | 24,000 | 34,000 |
Store supplies used........................... | 15,600 | 7,600 | 8,000 |
Depreciation?Store equipment......... | 16,600 |
| 16,600 |
Allocated expenses |
|
|
|
Sales salaries*.................................... | 208,000 | 104,000 | 104,000 |
Rent expense...................................... | 28,320 |
| 28,320 |
Bad debts expense............................. | 36,000 | 16,200 | 19,800 |
Office salary*..................................... | 62,400 |
| 62,400 |
Insurance expense*............................ | 6,200 | 1,540 | 4,660 |
Miscellaneous office expenses*......... | 8,000 | 800 | 7,200 |
Total expenses..................................... | $1,377,120 | $568,140 | $808,980 |
*Computation notes. Closing Department X will eliminate 70% of its insurance expense and 25% of its miscellaneous office expense. Sales salaries will be reduced by the amounts paid to the two clerks who will not be replaced. The office salary will not be eliminated, but it will be reclassified so that one-half will be reported as sales salary and one-half as office salary.
Part 2
| ? COMPANY |
| ||
| Forecasted Annual Income Statement |
| ||
| Under Plan to Eliminate Department 200 |
| ||
| Sales.......................................................... | $872,000 | ||
| Cost of goods sold..................................... | 524,000 | ||
| Gross profit from sales.............................. | 348,000 | ||
| Operating expenses |
| ||
| Advertising.............................................. | 34,000 | ||
| Store supplies used................................. | 8,000 | ||
| Depreciation of store equipment............. | 16,600 | ||
| Sales salaries........................................... | 135,200* | ||
| Rent expense........................................... | 28,320 | ||
| Bad debts expense................................... | 19,800 | ||
| Office salary............................................. | 31,200* | ||
| Insurance expense................................... | 4,660 | ||
| Miscellaneous office expenses................ | 7,200 | ||
| Total operating expenses........................... | 284,980 | ||
| Net income................................................. | $ 63,020 |
|
* Office salary reassignment | ||||
| Total | Sales | Office | |
| Salaries | Salaries | Salary | |
Salesclerks....................................................... | $104,000 | $104,000 |
| |
Office worker................................................... | 62,400 |
| $62,400 | |
Reassign office worker to sales.................... | 0 | 31,200 | (31,200) | |
Revised salaries.............................................. | $166,400 | $135,200 | $31,200 |
Part 3
?. COMPANY | ||
Reconciliation of Combined Income with Forecasted Income | ||
Combined net income ...................................................... | $ 74,880 | |
Less Dept.X's lost sales.................................................... | (580,000) | |
Plus Dept.X?s eliminated expenses................................... | 568,140 | |
Forecasted net income..................................................... | $ 63,020 |
Analysis
Department X's avoidable expenses of $568,140 are $11,860 less than its revenues of $580,000. This means the company's annual net income would be $11,860 less from eliminating Department X. This analysis suggests the department should not be eliminated.
Part 1 Analysis of Expenses under Elimination of Department X Total Expenses Eliminated Expenses Continuing Expenses Cost of goods sold............................................... $ 938,000 $414,000 $524,000 Direct expenses Advertising.......................................................... 58,000 24,000 34,000 Store supplies used........................................... 15,600 7,600 8,000 DepreciationStore equipment........................ 16,600 Allocated expenses Sales salaries*.................................................... 208,000 16,600 104,000 Rent expense...................................................... 28,320 Bad debts expense............................................. 36,000 104,000 28,320 16,200 Office salary*...................................................... 62,400 19,800 62,400 Insurance expense*............................................ 6,200 1,540 4,660 Miscellaneous office expenses*....................... 8,000 800 7,200 Total expenses...................................................... $1,377,120 $568,140 $808,980 *Computation notes. Closing Department X will eliminate 70% of its insurance expense and 25% of its miscellaneous office expense. Sales salaries will be reduced by the amounts paid to the two clerks who will not be replaced. The office salary will not be eliminated, but it will be reclassified so that one-half will be reported as sales salary and one-half as office salary. Part 2 ... COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales...................................................................... $872,000 Cost of goods sold............................................... 524,000 Gross profit from sales........................................ 348,000 Operating expenses Advertising......................................................... 34,000 Store supplies used........................................... 8,000 Depreciation of store equipment...................... 16,600 Sales salaries..................................................... 135,200* Rent expense...................................................... 28,320 Bad debts expense............................................ 19,800 Office salary........................................................ 31,200* Insurance expense............................................. 4,660 Miscellaneous office expenses........................ 7,200 Total operating expenses.................................... 284,980 Net income............................................................ $ 63,020 * Office salary reassignment Total Sales Salaries Salaries Salesclerks......................................................................... $104,000 $104,000 Office worker...................................................................... 62,400 Reassign office worker to sales....................................... 0 31,200 Revised salaries................................................................. $166,400 $135,200 Office Salary $62,400 (31,200) $31,200 Part 3 .... COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income ......................................................... $ 74,880 Less Dept.X's lost sales...................................................... (580,000) Plus Dept.X's eliminated expenses.................................... 568,140 Forecasted net income........................................................ $ 63,020 ANALYSIS Department X's avoidable expenses of $568,140 are $11,860 less than its revenues of $580,000. This means the company's annual net income would be $11,860 less from eliminating Department X. This analysis suggests the department should not be eliminated
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