Required information (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 $285,000 209,000 76,000 Combined $726,000 471,000 255,000 30,000 10,600 ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 Dept. 100 Sales $441,000 Cost of goods sold 262,000 Gross profit 179,000 Operating expenses Direct expenses Advertising 17,000 Store supplies used 5,500 Depreciation-store equipment 4.200 Total direct expenses 26,700 Allocated expenses Sales salaries 65,000 Rent expense 9.460 Bad debts expense 9,600 office salary 15,600 Insurance expense 2,500 Miscellaneous office expenses 2,000 Total allocated expenses 104,160 Total expenses 130,860 Net income (loss) $ 48,140 13,000 5,100 2.700 20,800 6.900 47.500 39,000 4,710 7.300 10.400 1,600 1,200 64,210 85,010 9,010) 104.000 14. 120 16,900 26,000 4,100 3,200 168,370 215,870 $ 39. 130 $ In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $500 per week, or $26,000 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: 68% of the insurance expense allocated to it to cover its merchandise inventory, and 22% 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. sted Continuing T L ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Eliminated Continuing Expenses Expenses Expenses Cost of goods sold $ 471,000 $ 209,000 $ 262.000 Direct expenses Advertising 30,000 13,000 17,000 Store supplies used 10,6001 5 ,100 5,500 Depreciation-Store equipment 6,900 6.900 Allocated expenses Sales salaries 104,000 39,000 7 65.000 Rent expense 14,170 14,170 Bad debts expense 16,900 7,300 9,600 Office salary 26,000 13,000 13,000 Insurance expense 4,100 1,088 3,012 Miscellaneous office expenses 3.200 264 2,936 Total expenses $ 686,870 $ 287.752 $ 399,113 Prey 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 22% of the miscellaneous office expenses presently allocated to it. BEZEN 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 | $ 441,000 Cost of goods sold 262,000 Gross profit from sales 179,000 Operating expenses Advertising 17,000 Store supplies used 5,500 Depreciation of store equipment 6,900 Sales salaries 65,000 Rent expense 14,170 Bad debts expense 9,600 Office salary 13.000|| Insurance expense 3,012 Miscellaneous office expenses 2936 Total operating expenses 137118 Net income $41.882 IS p. Inetul Salanes or two Saiescierks are charged to Department ou ine full salary or 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 22% of the miscellaneous office expenses presently allocated to it. 33 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). (Amounts to be deducted should be indicated by a minus sign.) ELEGANT DECOR COMPANY Reconciliation of Combined Income with Forecasted Income Combined net income s 39.130 Add: Dept 200's eliminated expenses 287.752 Less: Dept. 200's lost sales 285,000 Forecasted net income $ 41.882