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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

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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.

image text in transcribed 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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