Dept. 100 Dept. 200 Combined $280,000 177,000 6000478,00o 264,000 6000243,000 $4

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Dept. 100 Dept. 200 Combined $280,000 177,000 6000478,00o 264,000 6000243,000 $441,000 $721,000 Sales Cost of goods sold Gross profit Operating expenses Direct expenses Advertising Store supplies used Depreciation-Store equipment Total direct expenses 16,500 4,500 4,400 25,400 12,000 3,900 2,900 18,800 28,500 8,400 7,300 44,200 Allocated expenses Sales salaries Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses Total allocated expenses 65,000 9,500 9,700 15,600 1,700 2,300 103,800 129,200 $ 47,800 39,000 4,740 7,700 10,400 1,000 1,600 64,440 83,240 $(17,240) 104,000 14,240 17,400 26,000 2,700 3,900 168,240 212,440 30,560 Total expenses Net income (loss) In analyzing whether to eliminate Department 200, management considers the following a. The company has one office worker who earns $500 per week, or $26,000 per year, and four sales clerks who each b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to earn $500 per week, or $26,000 per year for each salesclerk. 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 25% of the miscellaneous office expenses presently allocated to it

Explanation / Answer

Revised Income Statement (considering elimination of Dept. 200)

Reconciliation of combined Income with forecasted Income:

Since the total income of the company is increasing it should discontinue department No. 200

Sales          4,41,000 Cost of Goods Sold          2,64,000 Gross Profit          1,77,000 Operating Expenses: Direct Expenses: - Advertising             16,500 - Store supplies used                4,500 - Depreciation -Store Equipment                4,400 Total Direct Expenses             25,400 Allocated Expenses: Sales Salaries             65,000 Rent Expense             14,240 Bad Debt Expense                9,700 Office Salary             13,000 Insurance Expense [1700+28% of 1,000]                1,980 Misc. office expenses [2300+75% of 1,600]                3,500 Total allocated Expense          1,07,420 Total Expense          1,32,820 Net Income / (loss)             44,180

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