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