Problem 10-6A Analyzing possible elimination of a department LO P4 [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 departmental income statements show the following. Dept. 200 $280,000 215,000 65,000 Combined $ 718,000 484,000 234,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. 100 Sales $438,000 Cost of goods sold 269,000 Gross profit 169,000 Operating expenses Direct expenses Advertising 17,000 Store supplies used 5,000 Depreciation-store equipment 4,600 Total direct expenses 26,600 Allocated expenses Sales salaries 65,000 Rent expense 9,450 Bad debts expense 9,400 Office salary 15,600 Insurance expense 1,900 Miscellaneous office expenses 2,700 Total allocated expenses 104,050 Total expenses 130,650 Net income (loss) $ 38,350 12,500 4,500 3,300 20,300 29,500 9,500 7,900 46,900 39,000 4,720 7,000 10,400 1,100 2,000 64,220 84,520 $(19,520 104,000 14,170 16,400 26,000 3,000 4,700 168,270 215,170 $ 18,830 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 salesclerks who each earns $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; 71% of the insurance expense allocated to it to cover its merchandise inventory; and 21% of the miscellaneous office expenses presently allocated to it. Problem 10-6A Part 1 Required: 1. Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk. ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Eliminated Continuing Expenses Expenses Expenses Direct expenses Allocated expenses Total expenses 2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100's sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk. ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Operating expenses Total operating expenses 3. Should Department 200 be eliminated? Should Department 200 be eliminated