Required Information Problem 25-6A 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. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Dept. 200 Combined $466,000 $297,000 $763,000 209,000 88,000 Sales 262,000 471,000 Cost of goods sold Gross profit Operating expenses Direct expenses 204,000 292,000 Advertising Store supplies used Depreciation-Store equipment Total direct expenses Allocated expenses 18,000 4,000 4,200 26,200 14,000 3,700 2,600 20,300 32,000 7,700 6,800 46,500 83,200 14,140 16,900 36,400 3,500 4,500 158,640 Sales salaries 52,000 9,410 9,500 21,840 2,100 2,600 97,450 31,200 4,730 7,400 14,560 1,400 1,900 61,190 81,490 6,510 73,840 Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total allocated expenses Total expenses 123,650 80,350 28 Net income (loss) In analyzing whether to eliminate Department 200, management considers the following: 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 salesclerks 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; 73% of the insurance expense allocated to it to cover its merchandise inventory: and 17% of the miscellaneous office expenses presently allocated to it Problem 25-6A 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 Expenses Eliminated Continuing Expenses Expenses Direct expenses Allocated expenses Total expenses 0 $ 0 0 Problem 25-6A Part 2 2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will ot 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 0 Operating expenses Total operating expenses 0 0 Problem 25-6A 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). ELEGANT DECOR COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income Forecasted net income