Techstars Company’s management is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company’s 2008 departmental income statement shows the following.

TECHSTARS COMPANY Departmental Income Statements For Year Ended December 31, 2008
	Dept. A	Dept. Z	Combined
Sales ……………………………………………………………….	$700,000	$175,000	$875,000
Cost of goods sold ………………………………………….	461,300	125,100	586,400
Gross profit …………………………………………………….	238,700	49,900	288,600
Operating expenses Direct expenses Advertising ………………………………………………..	27,000	3,000	30,000
Store supplies used ……………………………………	5,600	1,400	7,000
Depreciation-Store equipment ………………….	14,000	7,000	21,000
Total direct expenses ………………………………..	46,000	11,400	58,000
Allocated expenses
Sales salaries …………………………………………….	70,200	23,400	93,600
Rent expense …………………………………………….	22,080	5,520	27,600
Bad debts expense …………………………………….	21,000	4,000	25,000
Office salary ………………………………………………	20,800	5,200	26,000
Insurance expenses …………………………………..	4,200	1,400	5,600
Miscellaneous office expenses ………………….	1,700	2,500	4,200
Total allocated expenses ………………………….	139,980	45,020	182,000
Total expenses ……………………………………………….	186,580	53,420	240,000
Net income (loss) ……………………………………………	$ 52,120	$ (3,520)	$ 48,600

In analyzing whether to eliminate Department Z, management considers the following items:

1. The company has one office worker who earns $500 per week or $26,000 per year and four salesclerks who each earn $450 per week or $23,400 per year.
2. The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.
3. Eliminating Department Z 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 two remaining clerks if the one office worker works in sales half time. Eliminating Department Z 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.
4. The store building is rented under a long-term lease that cannot be changed. Therefore, Department A will use the space and equipment currently used by Department Z.
5. Closing Department Z will eliminate its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.

Required

1. Prepare a three-column report that lists items and amounts for (a) the company’s total expenses (including cost of goods sold)-in column 1, (b) the expenses that would be eliminated by closing Department Z-in column 2, and (c) the expenses that will continue-in column 3.
2. Prepare a forecasted annual income statement for the company reflecting the elimination of Department Z assuming that it will not affect Department A’s sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

Analysis Component

1. Reconcile the company’s combined net income with the forecasted net income assuming that Department Z is eliminated (list both items and amounts). Analyze the reconciliation and explain why you think the department should or should not be eliminated.