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
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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 | |||||||||||
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 | |||||||||||
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:
- 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.
- 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.
- 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.
- 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.
- 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.
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