Problem 23-6A Analysis of possible elimination of a department LO A1

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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 2013 departmental income statement shows the following.

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2013
	Dept. 100					Dept. 200					Combined
Sales		$	436,000				$	290,000				$	726,000
Cost of goods sold			262,000					207,000					469,000
Gross profit			174,000					83,000					257,000
Operating expenses
Direct expenses
Advertising			17,000					12,000					29,000
Store supplies used			4,000					3,800					7,800
DepreciationStore equipment			5,000					3,300					8,300
Total direct expenses			26,000					19,100					45,100
Allocated expenses
Sales salaries			65,000					39,000					104,000
Rent expense			9,440					4,720					14,160
Bad debts expense			9,900					8,100					18,000
Office salary			18,720					12,480					31,200
Insurance expense			2,000					1,100					3,100
Miscellaneous office expenses			2,400					1,600					4,000
Total allocated expenses			107,460					67,000					174,460
Total expenses			133,460					86,100					219,560
Net income (loss)		$	40,540				$	(3,100	)			$	37,440

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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

Required:
1.	Complete the three-column report that lists items and amounts for (a) the companys total expenses (including cost of goods sold)in column 1, (b) the expenses that would be eliminated by closing Department 200in column 2, and (c) the expenses that will continuein column 3. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.
THE ONES IN RED ARE WRONG.

NEED THOSE ANSWERS, CANT FIGURE OUT HOW TO DO IT.

Answer is complete but not entirely correct.

ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
	Total Expenses	Eliminated Expenses	Continuing Expenses
Cost of goods sold	$469,000	$207,000	$262,000
Direct expenses
Advertising	29,000	12,000	17,000
Store supplies used	7,800	3,800	4,000
DepreciationStore equipment	8,300	0	8,300
Allocated expenses
Sales salaries	104,000	52,000	52,000
Rent expense	14,160	0	14,160
Bad debts expense	18,000	8,100	9,900
Office salary	31,200	0	31,200
Insurance expense	3,100	770	2,330
Miscellaneous office expenses	4,000	400	3,600
Total expenses	$688,560	$284,070	$404,490