Required information

Problem 23-6A Analysis of possible elimination of a department LO A1

[The following information applies to the questions displayed below.] Elegant Decor Companys management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The companys 2017 departmental income statements shows the following.

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017
	Dept. 100					Dept. 200					Combined
Sales		$	447,000				$	287,000				$	734,000
Cost of goods sold			265,000					214,000					479,000
Gross profit			182,000					73,000					255,000
Operating expenses
Direct expenses
Advertising			17,000					13,000					30,000
Store supplies used			5,500					5,000					10,500
DepreciationStore equipment			4,400					2,900					7,300
Total direct expenses			26,900					20,900					47,800
Allocated expenses
Sales salaries			52,000					31,200					83,200
Rent expense			9,450					4,710					14,160
Bad debts expense			9,500					7,600					17,100
Office salary			15,600					10,400					26,000
Insurance expense			2,100					1,400					3,500
Miscellaneous office expenses			2,100					1,400					3,500
Total allocated expenses			90,750					56,710					147,460
Total expenses			117,650					77,610					195,260
Net income (loss)		$	64,350				$	(4,610	)			$	59,740

In analyzing whether to eliminate Department 200, management considers the following:

1. The company has one office worker who earns $500 per week, or $26,000 per year, and four sales clerks who each earn $400 per week, or $20,800 per year for each salesclerk.
2. 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.
3. 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 workers salary would be reported as sales salaries and half would be reported as office salary.
4. 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.
5. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 66% of the insurance expense allocated to it to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to it.

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 100s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

ELEGANT DECOR COMPANYForecasted Annual Income StatementUnder Plan to Eliminate Department 200Operating expensesTotal operating expenses