EDUC 100W Lecture 9: Week 9 Notes
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Elegant Decor Companyâs management is trying to decide whetherto eliminate Department 200, which has produced losses or lowprofits for several years. The companyâs 2017 departmental incomestatements shows the following.
ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2017 | ||||||||||||||
Dept. 100 | Dept. 200 | Combined | ||||||||||||
Sales | $ | 449,000 | $ | 284,000 | $ | 733,000 | ||||||||
Cost of goods sold | 270,000 | 212,000 | 482,000 | |||||||||||
Gross profit | 179,000 | 72,000 | 251,000 | |||||||||||
Operating expenses | ||||||||||||||
Direct expenses | ||||||||||||||
Advertising | 15,500 | 10,500 | 26,000 | |||||||||||
Store supplies used | 5,500 | 5,100 | 10,600 | |||||||||||
DepreciationâStoreequipment | 4,600 | 3,500 | 8,100 | |||||||||||
Total direct expenses | 25,600 | 19,100 | 44,700 | |||||||||||
Allocated expenses | ||||||||||||||
Sales salaries | 78,000 | 46,800 | 124,800 | |||||||||||
Rent expense | 9,470 | 4,720 | 14,190 | |||||||||||
Bad debts expense | 9,500 | 7,300 | 16,800 | |||||||||||
Office salary | 18,720 | 12,480 | 31,200 | |||||||||||
Insurance expense | 2,500 | 1,800 | 4,300 | |||||||||||
Miscellaneous officeexpenses | 2,600 | 1,800 | 4,400 | |||||||||||
Total allocated expenses | 120,790 | 74,900 | 195,690 | |||||||||||
Total expenses | 146,390 | 94,000 | 240,390 | |||||||||||
Net income (loss) | $ | 32,610 | $ | (22,000 | ) | $ | 10,610 | |||||||
In analyzing whether to eliminate Department 200, managementconsiders the following:
The company has one office worker who earns $600 per week, or$31,200 per year, and four sales clerks who each earn $600 perweek, or $31,200 per year for each salesclerk.
The full salaries of two salesclerks are charged to Department100. The full salary of one salesclerk is charged to Department200. The salary of the fourth clerk, who works half-time in bothdepartments, is divided evenly between the two departments.
Eliminating Department 200 would avoid the sales salaries andthe office salary currently allocated to it. However, managementprefers another plan. Two salesclerks have indicated that they willbe quitting soon. Management believes that their work can be doneby the other two clerks if the one office worker works in saleshalf-time. Eliminating Department 200 will allow this shift ofduties. If this change is implemented, half the office workerâssalary would be reported as sales salaries and half would bereported as office salary.
The store building is rented under a long-term lease that cannotbe changed. Therefore, Department 100 will use the space andequipment currently used by Department 200.
Closing Department 200 will eliminate its expenses foradvertising, bad debts, and store supplies; 67% of the insuranceexpense allocated to it to cover its merchandise inventory; and 15%of the miscellaneous office expenses presently allocated to it.
Required:
1. Complete the following report showing totalexpenses, expenses that would be eliminated by closing Department200 and the expenses that would continue. The statement shouldreflect the reassignment of the office worker to one-half time assalesclerk.
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2. Prepare a forecasted annual income statementfor the company reflecting the elimination of Department 200assuming that it will not affect Department 100âs sales and grossprofit. The statement should reflect the reassignment of the officeworker to one-half time as a salesclerk.
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