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 $ 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: The company has one office worker who earns $600 per week, or $31,200 per year, and four sales-clerks 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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it. 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. 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. 3. Should Department 200 be eliminated?

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 $ 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: The company has one office worker who earns $600 per week, or $31,200 per year, and four sales-clerks 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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it. 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. 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. 3. Should Department 200 be eliminated?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2019
	Dept. 100	Dept. 200	Combined
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:

The company has one office worker who earns $600 per week, or $31,200 per year, and four sales-clerks 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; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

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.

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.

3. Should Department 200 be eliminated?

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