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 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 show the following. Dept. 209 $290, 880 207, 980 83, see Combined $726,00 469,000 257, eee ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 180 Sales $436,000 Cost of goods sold 262.ee Gross profit 174,080 Operating expenses Direct expenses Advertising 17, eee Store supplies used 4,wee Depreciation Store equipment 5, eee Total direct expenses 26, mee Allocated expenses Sales salaries 65, eee Rent expense 9,440 Bad debts expense 9,988 Office salary 18,720 Insurance expense 2,08 Miscellaneous office expenses 2,480 Total allocated expenses 187,46 Total expenses 133,46 Net income (loss) $ 40, 540 12,800 3, Bee 3,3ee 19, lee 29,800 7,800 8,300 45, les 39,800 4,720 8,180 12,480 1,180 1,680 67,880 62.ee 86,188 $ (3,1ee) 184, eee 14,160 18,eee 31, 2ee 3,1ee 4,860 174,460 219,560 $ 37,440 In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who eams $600 per week, or $31,200 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: 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 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 Sales $ 438,000 436,000 Gross profit from sales Operating expenses Advertising 17,000 4,000 Store supplies used Depreciation of store equipment Total operating expenses 21,000 $ 415,000