Chapter 25, Problem 6AP

1.

To determine

Prepare a three-column report for (a) the company’s total expenses – column 1, (b) the expenses that would be eliminated by closing department 200 – column 2, and (c) the expenses that will continue – in column 3.

Explanation of Solution

Prepare a three-column report for (a) the company’s total expenses – column 1, (b) the expenses that would be eliminated by closing department 200 – column 2, and (c) the expenses that will continue – in column 3 as follows:

Company E
Analysis of Expenses under Elimination of Department 200
Particulars	Total expenses $\left(\text{A+B}\right)$	Eliminated expenses (A)	Continuing expenses (B)
Cost of goods sold	$469,000	$207,000	$262,000
Add: Direct expenses
Advertising	29,000	12,000	17,000
Store supplies used	7,800	3,800	4,000
Depreciation-Store equipment	8,300		8,300
Add: Allocated expenses
Sales salaries	104,000	52,000 (W.N. 1)	52,000 (W.N. 2)
Rent expense	14,160		14,160
Bad debts expense	18,000	8,100	9,900
Office salary	31,200		31,200
Insurance expense	3,100	770 (W.N. 3)	2,330 (W.N. 4)
Miscellaneous office expenses	4,000	400 (W.N. 5)	3,600 (W.N. 6)
Total expenses	$688,560	$284,070	$404,490

Table (1)

Working note 1:

Calculate the eliminated expense for sales salaries:

$\begin{array}{c}\text{Eliminated sales salaries = Combined sales salaries }\times \text{ Eliminating time}\\ \text{=\$104,000}\times \frac{1}{2}\\ =\$52,000\end{array}$

Working note 2:

Calculate the continuing expense for sales salaries

$\begin{array}{c}\text{Continuing sales salaries = }\left[\begin{array}{l}\text{Combined sales salaries }-\\ \text{ Eliminating sales salaries}\end{array}\right]\\ =\$104,000-\$52,000\text{ (W}\text{.N}\text{. 1)}\\ \text{=\$52,000}\end{array}$

Working note 3:

Calculate the eliminating expense for office salary:

$\begin{array}{c}\text{Eliminated insurance expense = }\left[\begin{array}{l}\text{Dep}\text{. 200 insurance expense }\times \\ \text{Eliminating percentage}\end{array}\right]\\ =\$1,100\times \frac{70}{100}\\ =\$770\end{array}$

Working note 4:

Calculate the continuing expense for office salary:

$\begin{array}{c}\text{Continuing insurance expense = }\left[\begin{array}{l}\text{Combined insurance expenes }-\\ \text{ Eliminating insurance expense}\end{array}\right]\\ =\$3,100-\$770\text{ (W}\text{.N}\text{. 3)}\\ \text{=\$2,330}\end{array}$

Working note 5:

Calculate the eliminated miscellaneous expense:

$\begin{array}{c}\text{Eliminated miscellaneous expense = }\left[\begin{array}{l}\text{Dep}\text{. 200 miscellaneous expense }\times \\ \text{Eliminating percentage}\end{array}\right]\\ =\$1,600\times \frac{25}{100}\\ =\$400\end{array}$

Working note 6:

Calculate the continuing miscellaneous expense:

$\begin{array}{c}\text{Continuing miscellaneous expense = }\left[\begin{array}{l}\text{Combined miscellaneous expenes }-\\ \text{ Eliminating miscellaneous expense}\end{array}\right]\\ =\$4,000-\$400\text{ (W}\text{.N}\text{. 5)}\\ \text{=\$3,600}\end{array}$

2.

To determine

Prepare a forecasted annual income statement for company E.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare a forecasted annual income statement for company E as follows:

Company E
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Particulars	$	$
Sales		436,000
Less: Cost of goods sold		262,000
Gross profit from sales		174,000
Less: Operating expenses
Advertising	17,000
Store supplies used	4,000
Depreciation of store equipment	8,300
Sales salaries (W.N. 8)	67,600
Rent expense	14,160
Bad debts expense	9,900
Office salary (W.N. 8)	15,600
Insurance expense	2,330
Miscellaneous office expenses	3,600	142,490
Net income		31,510

Table (2)

Working note 7:

Calculate the administrative worker to sales:

$\begin{array}{c}\text{Administrative worker = Combined office salary expense }\times \frac{1}{2}\\ =\$31,200\times \frac{1}{2}\\ =\$15,600\end{array}$

Working note 8:

Calculate the amount of salaries:

Particulars	Total salaries	Sales salaries	Office Salary
Salesclerks	52,000	52,000 (W.N. 2)
Administrative worker	31,200		31,200
Reassign administrative worker to sales	-	15,600 (W.N. 7)	(15,600)
Revised salaries	83,200	67,600	15,600

Table (3)

3.

To determine

Reconcile the company’s combined net income with the forecasted net income, if the department 200 is eliminated, analyze the reconciliation and explain the reason why the department should or should not be eliminated.

Explanation of Solution

Reconcile the company’s combined net income with the forecasted net income, if the department 200 is eliminated as follows:

Company E
Reconciliation of Combined Income With Forecasted Income
Particulars	$
Combined net income	37,440
Less: Department 200's lost sales	(290,000)
Add: Department 200’s eliminated expenses	284,070
Forecasted net income	31,510

Table (4)

Analyze the reconciliation and explain the reason why the department should or should not be eliminated as follows:

Department 200’s eliminated expenses of $284,070 is less than its revenue of $290,000. Since, company would get annual net income of $5,930$\left(\$290,000-\$284,070\right)$. Hence, this analysis suggests that the company should be not eliminated the Department 200.