Problem 10-6A Analysis of possible elimination of a department LO A1 (The following information applies to the questions displayed below.] 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 shows the following. Dept. 200 $ 287,000 208,000 79,000 Combined $ 732,000 475,000 257,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Sales $445,000 Cost of goods sold 267,000 Gross profit 178,000 Operating expenses Direct expenses Advertising 16,500 Store supplies used 5,500 Depreciation-Store equipment 4,200 Total direct expenses 26,200 Allocated expenses Sales salaries 65,000 Rent expense 9,450 Bad debts expense 9,800 Office salary 15,600 Insurance expense 2,500 Miscellaneous office expenses 2,300 Total allocated expenses 104,650 Total expenses 130,850 Net income (loss) $ 47,150 13,500 5,000 2,600 21,100 30,000 10,500 6,800 47,300 39,000 4,770 7,500 10,400 1,700 1,600 64,970 86,070 $ (7,070) 104,000 14,220 17,300 26,000 4,200 3,900 169,620 216,920 $ 40,080 In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $500 per week, or $26,000 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; 69% of the insurance expense allocated to it to cover its merchandise inventory; and 18% of the miscellaneous office expenses presently allocated to it. Analysis Component 3. Reconcile the company's combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.) Answer is complete but not entirely correct. ELEGANT DECOR COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income 40,080 Add: Dept 200's eliminated expenses 286,000 Less: Dept. 200's lost sales 287,000 Forecasted net income $ 394,080