Elegant Decor Company’s management is trying to decide whether to eliminate Depa

Question

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 2013 departmental income statement shows the following.

The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each earn $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 worker’s 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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

Complete the 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 200—in column 2, and (c) the expenses that will continue—in column 3. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

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.

Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated.

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 2013 departmental income statement shows the following.

Explanation / Answer

Answer 1. Elegant Décor Company Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Cost of goods Sold          469,000            207,000           262,000 Direct Expenses Advertsing            29,000              12,000             17,000 Stores Supplies Used               7,800                 3,800               4,000 Depreciation - Store Equipment               8,300                        -                 8,300 Allocated expenses Sales Salaries          104,000              52,000             52,000 Rent expenses            14,160                        -               14,160 Bad Debts Expenses            18,000                 8,100               9,900 Office Salary            31,200                        -               31,200 Insurance Expenses               3,100                    770               2,330 Misc Expenses               4,000                    400               3,600 Total Expenses          688,560            284,070           404,490 Answer 2. Elegant Décor Company Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales          436,000 Cost of Goods Sold          262,000 Gross profit          174,000 Opearting expenses Advertising            17,000 Store Supplies               4,000 Depreciation - Store Equipment               8,300 Total Direct Expenses            29,300 Allocated Expenses Sales Salaries            67,600 Rent Expenses            14,160 Bad Debts Expenses               9,900 Office Salary            15,600 Insurance Expenses               2,330 Misc. Office Exp.               3,600 Total Allocated Expenses          113,190 Total expenses          142,490 Net Income (loss)            31,510 Answer 3. Elegant Décor Company Reconciliation of Combined Income with Forecasted Income Combined Net Income            37,440 Savings of Total Expenses          284,070 Loss of Reveunue (Sales)        (290,000) Forecasted Income            31,510

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