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 shows the following. Dept. 200 $286,000 212,000 74,000 Combined $735,000 482,000 253,000 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Sales $ 449,000 Cost of goods sold 270,000 Gross profit 179,000 Operating expenses Direct expenses Advertising 17,500 Store supplies used 6,000 Depreciation-store equipment 4,000 Total direct expenses 27,500 Allocated expenses Sales salaries 52,000 Rent expense 9,410 Bad debts expense 9,400 Office salary 21,840 Insurance expense 2,300 Miscellaneous office expenses 2,000 Total allocated expenses 96,950 Total expenses 124,450 Net income (loss) $ 54,550 13,500 5,500 2,900 21,900 31,000 11,500 6,900 49,400 31,200 4,780 7,500 14,560 1,400 1,300 60, 740 82,640 $ (8,640) 83,200 14,190 16,900 36,400 3,700 3,300 157,690 207,090 $ 45,910 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 $400 per week, or $20,800 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; 68% of the insurance expense allocated to it to cover its merchandise inventory; and 21% of the miscellaneous office expenses presently allocated to it. 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