Relevant Cost

Sauls Company's management is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company's 2014 departmental income statement shows the following.

Saul Company Departmental Income Statement For year ended December 31, 2014

Department A Department Z Combined
Sales	$350,000 $87,500 $437,500
Cost of goods sold	230,650 62,550 293,200
Gross profit	119,350 24,950 144,300
Operating expenses
Advertising	13,500 1,500 15,000
Store supplies used	2,800 700 3,500
Depreciation store	7,000 3,500 10,500
Total direct expense	23,300 5,700 29,000
Allocated expenses
Sales salaries	35,100 11,700 46,800
Rent expense	11,040 2,760 13,800
Bad debts	10,500 2,000 12,500
Office salary	10,400 2,600 13,000
Insurance expense	2,100 700 2,800
Miscellaneous office expense	850 1,250 2,100
Total allocated expense	69,990 21,010 91,000
Total expenses	93,290 26,710 120,000
Net income	26,060 (1,760) 24,300

In analyzing whether to eliminate Department Z, management considers the following items:

a. The company has one office worker who earns $ 250 per week or $ 13,000 per year and four salesclerks who each earn $ 225 per week or $ 11,700 per year.

b. The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.

c. Eliminating Department Z 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 two remaining clerks if the one office worker

works in sales half-time. Eliminating Department Z 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 A will use the space and equipment currently used by

Department Z.

e. Closing Department Z will eliminate its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.

Required

1. Prepare a three-column report that lists items and amounts for (a) the company's total expenses (including cost of goods sold)in column 1, (b) the expenses that would be eliminated by closing Department Zin column 2, and (c) the expenses that will continuein column 3.

2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department Z assuming that it will not affect Department A's sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.