Required information Skip to question [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 departmental income statements show the following. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019 Dept. 100 Dept. 200 Combined Sales $ 438,000 $ 281,000 $ 719,000 Cost of goods sold 269,000 213,000 482,000 Gross profit 169,000 68,000 237,000 Operating expenses Direct expenses Advertising 17,000 13,500 30,500 Store supplies used 5,500 4,900 10,400 DepreciationStore equipment 4,000 2,900 6,900 Total direct expenses 26,500 21,300 47,800 Allocated expenses Sales salaries 65,000 39,000 104,000 Rent expense 9,400 4,800 14,200 Bad debts expense 9,700 7,400 17,100 Office salary 18,720 12,480 31,200 Insurance expense 2,100 1,300 3,400 Miscellaneous office expenses 2,500 1,800 4,300 Total allocated expenses 107,420 66,780 174,200 Total expenses 133,920 88,080 222,000 Net income (loss) $ 35,080 $ (20,080 ) $ 15,000 In analyzing whether to eliminate Department 200, management considers the following: The company has one office worker who earns $600 per week, or $31,200 per year, and four salesclerks who each earns $500 per week, or $26,000 per year for each salesclerk. 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. 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. 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. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 74% of the insurance expense allocated to it to cover its merchandise inventory; and 17% of the miscellaneous office expenses presently allocated to it.

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.

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 COMPANY Analysis of Expenses under Elimination of Department 200 Total Eliminated Continuing Expenses Expenses Expenses Cost of goods sold $ 482,000 $ 213,000 $ 269,000 Direct expenses Advertising 30,500 13,500 17,000 Store supplies used 10,400 4,900 5,500 DepreciationStore equipment 6,900 0 Allocated expenses Sales salaries 104,000 36,400 67,600 Rent expense 14,200 0 14,200 Bad debts expense 17,100 7,400 9,700 Office salary 31,200 Insurance expense 3,400 Miscellaneous office expenses 4,300 Total expenses $ 704,000 $ 275,200 $ 383,000 ELEGANT DECOR COMPANY Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales $ 438,000 Cost of goods sold 269,000 Gross profit from sales 169,000 Operating expenses Advertising 17,000 Store supplies used 5,500 Depreciation of store equipment 6,900 Sales salaries Rent expense 14,200 Bad debts expense 17,100 Office salary Insurance expense Miscellaneous office expenses Total operating expenses 60,700 Net income $ 108,300