Problem 10-6A Analysis of possible elimination of a department LO A1 [The following information applies to the questions displayed below.] Elegant Decor Companys management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The companys 2017 departmental income statements shows the following. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined Sales $ 448,000 $ 287,000 $ 735,000 Cost of goods sold 265,000 215,000 480,000 Gross profit 183,000 72,000 255,000 Operating expenses Direct expenses Advertising 16,000 13,000 29,000 Store supplies used 4,500 3,900 8,400 DepreciationStore equipment 4,800 3,600 8,400 Total direct expenses 25,300 20,500 45,800 Allocated expenses Sales salaries 65,000 39,000 104,000 Rent expense 9,400 4,780 14,180 Bad debts expense 9,800 7,900 17,700 Office salary 18,720 12,480 31,200 Insurance expense 1,500 800 2,300 Miscellaneous office expenses 2,400 1,700 4,100 Total allocated expenses 106,820 66,660 173,480 Total expenses 132,120 87,160 219,280 Net income (loss) $ 50,880 $ (15,160 ) $ 35,720 ________________________________________ 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 workers 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; 71% of the insurance expense allocated to it to cover its merchandise inventory; and 19% of the miscellaneous office expenses presently allocated to it.