Problem 23-6A Analysis of possible elimination of a department 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 2015 departmental income statements shows the following ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2015 Dept. 100 Dept. 200 Combined Sales $ 436.000 $ 286,000 $ 722.000 Cost of goods sold 267.000 208.000 475.000 Gross profit 169.000 78,000 247.000 Operating expenses Direct expenses Advertising 18.000 14,500 32.500 Store supplies used 4.500 4.000 8.500 Depreciation-Store equipment 4.600 3.100 7.700 Total direct expenses 27100 21600 48,700 Allocated expenses Sales salaries 65.000 39.000 104.000 Rent expense 9.490 4.710 14.200 Bad debts expense 9.400 7100 16.500 Office salary 18.720 12 480 31.200 Insurance expense 1900 1.100 3.000 Miscellaneous office expenses 2.100 1400 3.500 Tot allocated expenses 106 610 65.790 172.400 Hocateur experises Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses 65.000 9,490 9.400 18,720 1.900 2,100 39.000 4,710 7,100 12,480 1,100 1.400 104,000 14,200 16,500 31,200 3,000 3,500 Total allocated expenses 106,610 65,790 172,400 Total expenses 133.710 87390 221,100 Net Income (oss) $ 35.290 $ (9.390) $ 25,900 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 calary 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 malf-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 once calary, 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 wil liminate its expenses for advertising, bad debts, and store supplies 72% of the insurance expense located to it to cover its merchandise Inventory and 18% of the miscellaneous office excenses presentyallocated to it Problem 23-6A 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 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 Problem 23-6A Part 3 Analysis Component 3. Reconcile the company's combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.) ELEGANT DECOR COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income Forecasted net income