Chapter 25, Problem 6BP

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 Z – 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 Z – column 2, and (c) the expenses that will continue – in column 3 as follows:

Company E
Analysis of Expenses under Elimination of Department Z
Particulars	Total expenses $\left(\text{A+B}\right)$	Eliminated expenses (A)	Continuing expenses (B)
Cost of goods sold	$586,400	$125,100	$461,300
Add: Direct expenses
Advertising	30,000	3,000	27,000
Store supplies used	7,000	1,400	5,600
Depreciation-Store equipment	21,000		21,000
Add: Allocated expenses
Sales salaries	93,600	46,800 (W.N. 1)	46,800 (W.N. 2)
Rent expense	27,600		27,600
Bad debts expense	25,000	4,000	21,000
Office salary	26,000		26,000
Insurance expense	5,600	910  (W.N. 3)	4,690 (W.N. 4)
Miscellaneous office expenses	4,200	750 (W.N. 5)	3,450 (W.N. 6)
Total expenses	$826,400	$181,960	$644,440

Table (1)

Working note 1:

Calculate the eliminated expense for sales salaries:

$\begin{array}{c}\text{Eliminated sales salaries = Combined sales salaries }\times \text{ Eliminating time}\\ \text{=\$93,600}\times \frac{1}{2}\\ =\$46,800\end{array}$

Working note 2:

Calculate the continuing expense for sales salaries:

$\begin{array}{c}\text{Continuing sales salaries = }\left[\begin{array}{l}\text{Combined sales salaries }-\\ \text{ Eliminating sales salaries}\end{array}\right]\\ =\$93,600-\$46,800\text{ (W}\text{.N}\text{. 1)}\\ \text{=\$46,800}\end{array}$

Working note 3:

Calculate the eliminating expense for office salary:

$\begin{array}{c}\text{Eliminated insurance expense = }\left[\begin{array}{l}\text{Dep}\text{. 200 insurance expense }\times \\ \text{Eliminating percentage}\end{array}\right]\\ =\$1,400\times \frac{65}{100}\\ =\$910\end{array}$

Working note 4:

Calculate the continuing expense for office salary:

$\begin{array}{c}\text{Continuing insurance expense = }\left[\begin{array}{l}\text{Combined insurance expenes }-\\ \text{ Eliminating insurance expense}\end{array}\right]\\ =\$5,600-\$910\text{ (W}\text{.N}\text{. 3)}\\ \text{=\$4,690}\end{array}$

Working note 5:

Calculate the eliminated miscellaneous expense:

$\begin{array}{c}\text{Eliminated miscellaneous expense = }\left[\begin{array}{l}\text{Dep}\text{. 200 miscellaneous expense }\times \\ \text{Eliminating percentage}\end{array}\right]\\ =\$2,500\times \frac{30}{100}\\ =\$750\end{array}$

Working note 6:

Calculate the continuing miscellaneous expense:

$\begin{array}{c}\text{Continuing miscellaneous expense = }\left[\begin{array}{l}\text{Combined miscellaneous expenes }-\\ \text{ Eliminating miscellaneous expense}\end{array}\right]\\ =\$4,200-\$750\text{ (W}\text{.N}\text{. 5)}\\ \text{=\$3,450}\end{array}$

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 Z
Particulars	$	$
Sales		700,000
Less: Cost of goods sold		461,300
Gross profit from sales		238,700
Less: Operating expenses
Advertising	27,000
Store supplies used	5,600
Depreciation of store equipment	21,000
Sales salaries (W.N. 8)	59,800
Rent expense	27,600
Bad debts expense	21,000
Office salary (W.N. 8)	13,000
Insurance expense	4,690
Miscellaneous office expenses	3,450	183,140
Net income		55,560

Table (2)

Working note 7:

Calculate the office clerk to sales:

$\begin{array}{c}\text{Office clerk= Combined office salary expense }\times \frac{1}{2}\\ =\$26,000\times \frac{1}{2}\\ =\$13,000\end{array}$

Working note 8:

Calculate the amount of revised salaries:

Particulars	Total salaries	Sales salaries	Office Salary
Salesclerks	46,800	46,800 (W.N. 2)
Office clerk	26,000		26,000
Reassign office clerk to sales	-	13,000 (W.N. 7)	(13,000)
Revised salaries	72,800	59,800	13,000

Table (3)

3.

To determine

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

Company E
Reconciliation of Combined Income With Forecasted Income
Particulars	$
Combined net income	48,600
Less: Department Z's lost sales	(175,000)
Add: Department Z’s eliminated expenses	181,960
Forecasted net income	55,560

Table (4)

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

Department Z’s eliminated expenses of $181,960 is greater than its revenue of $175,000. Since, company would get annual net loss of 6,960$\left(\$181,960-\$175,000\right)$. Hence, this analysis suggests that the company should eliminate the Department Z as planned.