Elegant Decor Company\'s management is trying to decide whether to eliminate Dep

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. ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2013 Sales Cost of goods sold Dept. 100 446,000 269,000 Dept. 200 288,000 208,000 Combined $734,000 477,000 77000 80,000 257,000 Gross profit Operating expenses Direct expenses Advertising Store supplies used Depreciation-Store equipment 7,000 5,500 4,600 13,000 5,100 3,400 30,000 10,600 8,000 Total direct expenses 27,100 21,500 48,600 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses 78,000 9.470 9,500 21,840 1,900 2,400 46,800 4,750 7.300 14,560 1,100 124,800 14,220 16,800 36,400 3,000 4,100 Total allocated expenses 123,110 76,210 199,320 247,920 $26,790 (17,710) $ 9,080 Total expenses 150,210 97,710 Net income loss) In analyzing whether to eliminate Department 200, management considers the following: a. The company has one office worker who earns $700 per week, or $36,400 per year, and four sales clerks b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is who each earn $600 per week, or $31,200 per year for each salesclerk. 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; 72% of the insurance expense allocated to it to cover its merchandise inventory; and 21% of the miscellaneous office expenses presently allocated to it

Explanation / Answer

Answer for question no:1:

Answer for question no.2:

Total expenses column of the above answer is used for expenses in the below statement.

Answer for question no.3:

Particulars Total expenses Eliminated expenses Continuing expenses Remarks Cost of goods $734,000.00 $288,000.00 $446,000.00 Direct expenses Advertising $30,000.00 $13,000.00 $17,000.00 Store supplies $10,600.00 $5,100.00 $5,500.00 Depreciation -Store equipment $8,000.00 $8,000.00 Allocated expenses Sales salaries $124,800.00 $62,400.00 $80,600.00 Sales salaries is computed as 31200*2+36400/2i.e., halfsalary of office worker Rent expenses $14,220.00 $14,220.00 Bad debts expenses $16,800.00 $7,300.00 $9,500.00 Office salary $36,400.00 $18,200.00 Half of the office worker salary in included in sales salary Insurance expenses $3,000.00 $792.00 $2,429.76 72% of insurance expense i.e.,1700 is elimiatned Miscellaneous expenses $4,100.00 $357.00 $3,743.00 21% of 1700 is eliminated Total $981,920.00 $376,949.00 $605,763.00

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