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 departmental income statements show the following.   ELEGANT

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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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 departmental income statements show the following.
 

ELEGANT DECOR COMPANY
Departmental Income Statements
For Year Ended December 31, 2019
  Dept. 100 Dept. 200 Combined
Sales   $ 444,000       $ 281,000       $ 725,000  
Cost of goods sold     261,000         210,000         471,000  
Gross profit     183,000         71,000         254,000  
Operating expenses                            
Direct expenses                            
Advertising     16,500         13,000         29,500  
Store supplies used     5,500         4,900         10,400  
Depreciation—Store equipment     4,200         2,800         7,000  
Total direct expenses     26,200         20,700         46,900  
Allocated expenses                            
Sales salaries     65,000         39,000         104,000  
Rent expense     9,430         4,770         14,200  
Bad debts expense     9,600         7,300         16,900  
Office salary     15,600         10,400         26,000  
Insurance expense     2,300         1,400         3,700  
Miscellaneous office expenses     2,100         1,500         3,600  
Total allocated expenses     104,030         64,370         168,400  
Total expenses     130,230         85,070         215,300  
Net income (loss)   $ 52,770       $ (14,070 )     $ 38,700  
 


In analyzing whether to eliminate Department 200, management considers the following:
 

  1. The company has one office worker who earns $500 per week, or $26,000 per year, and four salesclerks who each earns $500 per week, or $26,000 per year for each salesclerk.
  2. 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.
  3. 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.
  4. 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.
  5. 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 24% of the miscellaneous office expenses presently allocated to it.
ernal_browser%3D08&launchUrl=https%253A%252F%252Fccbcmd-bb.E
nework Required 6
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Required information
Requlred:
1. Complete the following report showIng total expenses, expenses that would be ellminated 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.
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
Total
Expenses
Eliminated
Expenses
Continuing
Expenses
Direct expenses
Allocated expenses
Total expenses
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Transcribed Image Text:ernal_browser%3D08&launchUrl=https%253A%252F%252Fccbcmd-bb.E nework Required 6 Saved Required information Requlred: 1. Complete the following report showIng total expenses, expenses that would be ellminated 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. ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Direct expenses Allocated expenses Total expenses < Prev 7. of 7 Next > 5373...jpg 144560148 79137...jpg 144211699 21846...jpg 國 LC here to search F1 F10 F9 C F5 F8 F7 F6 F4 F3 F2 F1 4. 2 %#3
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