Problem 23-6A Analysis of possible elimination of a departme 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. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined $290,000 214,000 Sales Cost of goods sold Gross profit Operating expenses $437,000 261,000 176, 000 $727,000 475,000 252, 000 76, 000 Direct expenses Advertising Store supplies used Depreciation-Store equipment Total direct 15,500 4,500 4, 200 24, 200 10,500 3, 900 2,900 17, 300 26, 000 8,400 7,100 41,500 expenses Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total allocated expenses 65,000 9, 400 9,400 18,720 1,500 2,400 06,420 130, 620 $45,380 39, 000 4,780 7,300 12,480 700 1,600 65,860 104, 000 14,180 16, 700 31, 200 2, 200 4,000 72, 280 Total expenses Net income (loss) 83,160 213,78 7,160) 38, 220 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 b. The ful salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to earn $500 per week, or $26,000 per year for each salesclerk. 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 wll 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; 68% of the insurance expense allocated to it to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to it. Problem 23-6A 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