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 2015 departmental income statements shows the following. In analyzing whether to eliminate Department 200, management considers the following: The company has one office worker who earns $500 per week, or $26,000 per year, and foru sales clerks who each earn $400 per week, or $20,800 per year for each salesclerk. The full salaries fo 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 eliminates its expenses for advertising, bad debts, and store supplies; 74% of the insurance exoense allocated to it to cover its merchandise inventory; and 20% of the miscellaneous office expenses presently allocated to it.

Explanation / Answer

Elegant Décor Analysis of expenses under elimination of Dept 200 Details Total Expense Eliminated Expense Continuing Expense Cost of goods sold                 214,000                214,000                       -   Direct Opearting Expenses Advertising                    13,500                  13,500                       -   store supplies                      4,000                     4,000                       -   Depreciation                      2,900                            -                  2,900 Allocated Expenses Sales salary                    31,200                  20,800              10,400 (office salary of 200 continues as sales salary in 100) Rent                      4,720                            -                  4,720 Bad debt                      8,100                     8,100                       -   Office salary                    10,400                  10,400                       -   Insurance                      1,000                        740                    360 Misc Office Expenses                      1,500                        300                1,200 Total Expenses                 291,320                271,840              19,580

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