Required information Problem 10-6A 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 2017 departmental income statements shows the following. Dept. 200 $286,000 211,000 75,000 Combined $728,000 480,000 248,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Sales $442,000 Cost of goods sold 269,000 Gross profit 173,000 Operating expenses Direct expenses Advertising 15,000 Store supplies used 5,500 Depreciation-store equipment 5,000 Total direct expenses 25,500 Allocated expenses Sales salaries 65,000 Rent expense Bad debts expense Office salary 21,840 Insurance expense 1,900 Miscellaneous office expenses 2,400 Total allocated expenses 110,500 Total expenses 136,000 Net income (loss) $ 37,000 10,500 5, 200 3,900 19,600 25,500 10,700 8,900 45,100 9,460 9.900 39,000 4,740 7,600 14,560 1,000 1,800 68, 700 88,300 $(13,300) 104,000 14,200 17,500 36,400 2,900 4,200 179,200 224,300 $ 23,700 In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $700 per week, or $36,400 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 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 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; 67% of the insurance expense allocated to it to cover its merchandise inventory; and 23% of the miscellaneous office expenses presently allocated to it. Problem 10-6A 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 10-6A 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 10-6A 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