Problem 10-6A Analyzing possible elimination of a department LO P4

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. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. 100 Dept. 200 Combined Sales $446,000 $281,000 $727,000 Cost of goods sold 261,000 214,000 475,000 Gross profit 185,000 67,000 252,000 Operating expenses Direct expenses Advertising 16,500 13,000 29,500 Store supplies used 5,500 4,900 10,400 Depreciation-Store equipment 4,400 2,900 7,300 Total direct expenses 26,400 20,800 47,200 Allocated expenses Sales salaries 65,000 39,000 104,000 Rent expense 9,450 4,720 14,170 Bad debts expense 9,400 7,400 16,800 Office salary 18,720 12,480 31,200 Insurance expense 1,700 900 2,600 Miscellaneous office expenses 2,400 1,800 4,200 Total allocated expenses 106,670 66,300 172,970 Total expenses 133,070 87,100 220,170 Net income (loss) $ 51,930 $(20,100) $ 31,830 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 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: 66% of the insurance expense allocated to it to cover its merchandise inventory; and 22% 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 Problem 10-6A Part 2 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 Problem 10-6A Part 3 3. Should Department 200 be eliminated? Should Department 200 be eliminated