Problem 10-6A Part 1Required:1.Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement sho

Problem 10-6A Part 1

Required:

1.

Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk.

Problem 10-6A Analysis of possible elimination of a department LO A1

[The following information applies to the questions displayed below.]

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 show the following.

ELEGANT DECOR COMPANYDepartmental Income StatementsFor Year Ended December 31, 2015

 Dept. 100Dept. 200Combined

  Sales $436,000   $290,000   $726,000 

  Cost of goods sold  262,000    207,000    469,000 

  Gross profit  174,000    83,000    257,000 

  Operating expenses              

    Direct expenses              

       Advertising  17,000    12,000    29,000 

       Store supplies used  4,000    3,800    7,800 

       Depreciation—Store equipment  5,000    3,300    8,300 

       Total direct expenses  26,000    19,100    45,100 

    Allocated expenses              

       Sales salaries  65,000    39,000    104,000 

       Rent expense  9,440    4,720    14,160 

       Bad debts expense  9,900    8,100    18,000 

       Office salary  18,720    12,480    31,200 

       Insurance expense  2,000    1,100    3,100 

       Miscellaneous office expenses  2,400    1,600    4,000 

       Total allocated expenses  107,460    67,000    174,460 

  Total expenses  133,460    86,100    219,560 

  Net income (loss) $40,540   $(3,100)  $37,440 

In analyzing whether to eliminate 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 who each earn $500 per week, or $26,000 per year for each salesclerk.

b.

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.

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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

Required:

1.

Complete the following report showing total expenses, expenses that would be eliminated by closing Department 200 and the expenses that would continue. The statement should reflect the reassignment of the office worker to one-half time as salesclerk.

Problem 10-6A Part 2

2.

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.

Problem 10-6A Part 3

Analysis Component

3.

Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.)

Leave a Reply