Question

Elegant Decor Company’s management is trying to decide whetherto eliminate Department 200, which has produced losses or lowprofits for several years. The company’s 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
Depreciation—Storeequipment			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 worker’ssalary 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.

ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
	Total Expenses	Eliminated Expenses	Continuing Expenses
Cost of goods sold	$482,000	$212,000	$270,000
Directexpenses
Advertising	26,000	10,500	15,500
Store supplies used	10,600	5,100	5,500
Depreciation—Store equipment	8,100		8,100
Allocatedexpenses
Sales salaries	124,800
Rent expense	14,190		14,190
Bad debts expense	16,800	7,300	9,500
Office salary
Insurance expense	4,300
Miscellaneous office expenses	4,400
Total expenses	$691,190	$234,900	$322,790

2. Prepare a forecasted annual income statementfor the company reflecting the elimination of Department 200assuming that it will not affect Department 100’s sales and grossprofit. The statement should reflect the reassignment of the officeworker to one-half time as a salesclerk.

ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales	$449,000
Cost of goods sold	(270,000)
Gross profit from sales	179,000
Operatingexpenses
Advertising	15,500
Store supplies used
Depreciation of store equipment	8,100
Sales salaries
Rent expense	14,190
Bad debts expense	9,500
Office salary
Insurance expense
Miscellaneous office expenses
Totaloperating expenses	47,290
Net income	$131,710