Turftime 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 2011 departmental income statement shows the following.

In analyzing whether to eliminate Department Z, management considers the following items:
a. The company has one office worker who earns $250 per week or $13,000 per year and four salesclerks who each earn $225 per week or $11,700 per year.
b. The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.
c. 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.
d. 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.
e. 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
3. 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 beeliminated.

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TURFTIME COMPANY Departmental Income Statements For Year Ended December 31,2011I Dept.A Dept.Z Combined Sales. $350,000 $87,500 $437,500 Gross profit Operating expenses 44,300 Direct expenses 15,000 Advertising. Store supplies used Depreciation Store equipment Total direct expenses. . .. 13.500 500 2,800 7000 3,500 10500 29,000 23,300 5.700 Allocated expenses Sales salaries Rent expense.. Bad debts Office salary Insurance expense 35,100 11,700 ,040 2,760 10.500 2,000 10.400 2,600 2.100 3,800 2,500 13,000 expenseIN Total allocated expenses. Total expenses Net income (loss) 850 250 2,100 69.990 21010 91,000 20,000 26.060 $(1.760) 24,300 93.290 26,710 . ..