QUESTION 1 (13 marks) PLEASE PROVIDE THE FORMULAS The Vice President of an oil servicing company thinks that Department A needs to be eliminated as it is affecting the entire organization. You have been assigned the job of determining if Department A should be eliminated or not and informing the President. The following information has been gathered to assist you in making this decision: Income Statement For the Quarter Ended Sept 30th, 2020 Sales less: Variable Costs Contribution Margin Total $1,500,000 903,600 $596,400 Department A B $280,000 $700,000 156,000 435,600 124,000 264,400 $520,000 312,000 208,000 Less fixed expenses: Direct advertising 97,500 26,000 40,000 31,500 General advertising 30,000 5,600 14,000 10,400 Salaries 136,000 36,000 58,000 42,000 Rent on building ** 76,500 19,000 31,500 26,000 Utilities 30,900 8,000 13,600 9,300 Depreciation of fixtures 40,000 10,800 16,300 12,900 Insurance on inventory and fixtures 3,700 1,200 1,400 1,100 Ganarlnffira anoncor 60.000 20.000 20.00 Question #1 Question #1 SOLUTION Question #2 Question #2 SOLUTION non Income Statement For the Quarter Ended Sept 30th, 2020 Sales less: Variable Costs Contribution Margin Total $1,500,000 903,600 $596,400 Department B $280,000 $700,000 156,000 435,600 124,000 264,400 C $520,000 312,000 208,000 Less fixed expenses: Direct advertising General advertising Salaries Rent on building Utilities Depreciation of fixtures Insurance on inventory and fixtures General office expenses Service department allocations Total fixed expenses Operating income (loss) 97,500 30,000 136,000 76,500 30,900 40,000 26,000 5,600 36,000 19,000 8,000 10,800 40,000 14,000 58,000 31,500 13,600 16,300 31,500 10,400 42,000 26,000 9,300 12,900 ** 3,700 60,000 45,000 519,600 $76,800 1,200 20,000 15,000 141,600 ($17,600) 1,400 20,000 15,000 209,800 $54,600 1,100 20,000 15,000 168,200 $39,800 * Allocated based on sales dollars ** Allocated based on space occupied Question 1 Question #1 SOLUTION Question 2 Question #2 SOLUTION The following information is also necessary to assist you in your decision. 1 One of the part-time salaried employees in Department A has been with the company for many years. If Department A is eliminated, she will be transferred to another department with a salary of $4,000 per quarter. All other employees will be laid off. 2 All departments are housed in the same building. The store leases the entire building at a fixed annual rental rate. 3 of Department A is eliminated, the utilities bill will be reduced by about $7,000 per quarter. 4 If Department A is eliminated, the fixtures in the department will be transferred to the other departments. 5 One fourth of the insurance in Department A relates to the fixtures in the department; the remainder relates to the department's merchandise inventory. 6 General office expenses will not change as they relate to the head office. 7 The company has two service departments - purchasing and warehouse. If Department A is eliminated, the company can lay off one full-time and one part-time person from these departments. The combined salaries and other employee costs of these employees is $5,300 per quarter. + REQUIRED: a. Assume the company has no alternative use for the space now being occupied by Question I Question # SOLUTION Question 2 Question #2 SOLUTION Search for anything REQUIRED: a. Assume the company has no alternative use for the space now being occupied by Department A. Prepare a schedule to show whether or not the department should be eliminated. (Assume that eliminating Department A will have not effect on the other departments.) (9 marks) b. Assume that the space being occupied by Department A is quite valuable and could be subleased at a rental rate of $60,000 per quarter. Would you advise the company to eliminate Department A and sublease the space? (4marks)