Problem 10-6A Analyzing possible elimination of a department LO P4 Skip to question [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 departmental income statements show the following. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. 100 Dept. 200 Combined Sales $ 439,000 $ 285,000 $ 724,000 Cost of goods sold 265,000 215,000 480,000 Gross profit 174,000 70,000 244,000 Operating expenses Direct expenses Advertising 15,500 12,000 27,500 Store supplies used 5,500 5,000 10,500 DepreciationStore equipment 4,600 3,200 7,800 Total direct expenses 25,600 20,200 45,800 Allocated expenses Sales salaries 78,000 46,800 124,800 Rent expense 9,490 4,740 14,230 Bad debts expense 9,600 7,600 17,200 Office salary 15,600 10,400 26,000 Insurance expense 2,100 1,300 3,400 Miscellaneous office expenses 2,100 1,500 3,600 Total allocated expenses 116,890 72,340 189,230 Total expenses 142,490 92,540 235,030 Net income (loss) $ 31,510 $ (22,540 ) $ 8,970 In analyzing whether to eliminate Department 200, management considers the following: The company has one office worker who earns $500 per week, or $26,000 per year, and four salesclerks who each earns $600 per week, or $31,200 per year for each salesclerk. 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. 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. 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. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 72% of the insurance expense allocated to it to cover its merchandise inventory; and 23% of the miscellaneous office expenses presently allocated to it.

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. 2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.