Problem 23-6A Analysls of posslble ellmlnatlon of a department LO A1 The following Information applies to the questions displayed below Elegant Decor Company's management Is trylng to decide whether to ellminate Department 200, whlch has produced losses or low profits for several years. The company's 2017 departmental Income statements show the followng ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended Decenber 31, 2817 Dept. 18 Dept. 288 Combined $436,899 $299,899 $726,880 Sales Cost of goods sold Gross profit Operating expenses 267, 262,808 174 409 83,699 257,608 Direct expenses 29,090 7,889 17,690 4,808 5,880 26,890 12,690 3,868 Store supplies used Depreciation-Store equipment Total direct expenses 19,189 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary 65,899 9,448 9,988 18,728 2,880 2.488 39,008 4,728 8,180 12,480 1,108 1,668 184,690 14,168 18,008 31,280 3,180 4,008 Miscellaneous office expenses Total allocated expenses Total expenses Net income (loss) 6,199 Ss S 48,548 (3,1) 37,448 19,560 In analyzing whether to ellminate Department 200, management conslders 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 full salarles of two salesclerks are charged to Department 100. The full salary of one clerk Is charged to C. Elminating Department 200 would avold the sales salarles and the office salary currently allocated to It. However, 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. management prefers another plan. Two salesclerks have Indicated that they will be quitting soon. Management belleves that thelr work can be done by the other two clerks If the one office worker works In sales half-tlme. Eliminating Department 200 will allow this shift of dutieslf this change is implemented, half the office worker's salary would be reported as sales salarles and half would be reported as office salary. d. The store bulding is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equlpment currently used by Departmet 200. e Closing Department 200 will elminate 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 Problem 23-6A Part 3 Analysis Component 3. Reconclle the company's comblned 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.) NT DECOR C Combined net income Add: Dept. 200s eliminated expenses Less: Dept. 200's lost sales Forecasted net income 37,440 31,510