The following information applies to the questions displayed below.] Elegant Dec

Question

The following information applies to the questions displayed below.] Elegant Decor Company's management is trying to decide whether to ellminate Department 200, which has produced losses or low profits for several years. The company's 2015 departmental Income statements shows the following ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2015 Dept. 100 $445,000 267,000 Dept. 200 289,000 208,000 Combined $ 734,000 475,000 Sales Cost of goods sold 178,000 81,000 259,000 Gross profit Operating expenses Direct expenses Advertising Store suppliles used Depreclation-Store equlpment 17,000 5,500 4,200 2,500 4,900 2,900 29,500 10,400 7,100 Total direct expenses 26,700 20,300 47,000 Allocated expenses Sales salarles Rent expense Bad debts expense Office salary Insurance expense Miscellaneous office expenses 65,000 9.420 9,400 18,720 1,700 2,500 39,000 4,770 7,300 12,480 900 1,800 104,000 4.190 16,700 31,200 2,600 4,300 Total allocated expenses 66,250 172,990 219,990 $44,560 $(5,550 39,010 106,740 Total expenses 133,440 86,550 Net Income (loss) In analyzing whether to ellminate Department 200, management considers the following a. The company has one office worker who earns $600 per week, or $31,200 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 $500 per week, or $26,000 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. Ellminating Department 200 would avold 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 belleves that thelr work can be done by the other two clerks if the one office worker works In sales half-tlme. Ellminating Department 200 will allow this shift of duties. If thls 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 bullding 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; 74% of the insurance expense allocated to lt to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to It.

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                   475,000                   208,000                  267,000 Direct Expenses Advertising                     29,500                     12,500                    17,000 Store Supplies Used                     10,400                       4,900                      5,500 Depreciation - Store Equipment                        7,100                              -                        7,100 Allocated Expenses                             -   Sales Salaries                   104,000                     52,000                    52,000 Rent Expenses                     14,190                              -                      14,190 Bad Debts Expenses                     16,700                       7,300                      9,400 Office Salary                     31,200                              -                      31,200 Insurance Expense                        2,600                           666                      1,934 Misc Office Expense                        4,300                           432                      3,868 Total Expenses                   694,990                   285,798                  409,192 Eliminated Expenses: Insurance Expenses - $900 X 74%                           666 Misc. Office Exp. - $1,800 X 24%                           432 Office Salaries are not eliminated, but it will reclassified into sales Salaies & office salaries. Answer 2. Elegant Décor Company Forecasted Annual Income Statement Under Plan to Eliminate Department 200 Sales                   445,000 Cost of Goods Sold                   267,000 Gross Profit                   178,000 Operating Expenses Advertising                     17,000 Store Supplies                        5,500 Depreciation - Store Equipment                        7,100 Sales Salaries - $52,000 + $15,600                     67,600 Rent Expenses                     14,190 Bad Debts Expenses                        9,400 Office Salary - $31,200 - $15,600                     15,600 Insurance Expense                        1,934 Misc Office Expense                        3,868 Total Operating Expenses                   142,192 Net Income                     35,808 Answer 3. Elegant Décor Company Reconciliation of Combined Income with Forecasted Income Combined Net Income                     39,010 Less: Department 200 Lost sales                 (289,000) Add: Department 200 - Eliminated Expenses                   285,798 Forecasted Net Income                     35,808

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