Chapter 25, Problem 6BPSB

To determine

Concept Introduction:

Eliminated expenses-

These are the expenses that would be eliminated with the closure of the department. The example of eliminated expenses include cost of goods sold, advertising, stores supplies, sales salaries, bad debt expenses, insurance expenses, and the miscellaneous office expenses.

Continuing expenses:

These are the expenses that would continue even the closure of any department.

Requirement 1:

We have to determine the three column report.

Answer to Problem 6BPSB

	Total expenses ($)	Eliminated expenses($)	Continuing expenses ($)
Total expenses	$826,400	$181,960	$644,440

Explanation of Solution

Esme DÉCOR COMPANY Analysis of expenses under elimination of Department z
	Total expenses ($)	Eliminated expenses($)	Continuing expenses ($)
Cost of goods sold	$586,400	$125,100	$461,300
Direct expenses
Advertising	30,000	3,000	27,000
Store supplies used	7,000	1,400	5,600
Depreciation of store equip	21,000		21,000
Allocated expenses
Sales salaries	93,600	46,800	46,800
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	4,690
Miscellaneous office expenses	4,200	750	3,450
Total expenses	$826,400	$181,960	$644,440

To determine

Concept Introduction:

Eliminated expenses-

These are the expenses that would be eliminated with the closure of the department. The example of eliminated expenses include cost of goods sold, advertising, stores supplies, sales salaries, bad debt expenses, insurance expenses, and the miscellaneous office expenses.

Continuing expenses:

These are the expenses that would continue even the closure of any department.

Requirement 2:

We have to determine the forecasted annual income statement.

Answer to Problem 6BPSB

The forecasted annual income is $ 55,560.

Explanation of Solution

ESME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales	$700,000
Cost of goods sold	461,300
Gross profit from sales	238,700
Operating expenses
Advertising	27,000
Store supplies used	5,600
Depreciation of store equipment	21,000
Sales salaries	59,800
Rent expense	27,600
Bad debts expense	21,000
Office salary	13,000
Insurance expense	4,690
Miscellaneous office expenses	3,450
Total operating expenses	183,140
Net income	$ 55,560

To determine

Concept Introduction:

Eliminated expenses-

These are the expenses that would be eliminated with the closure of the department. The example of eliminated expenses include cost of goods sold, advertising, stores supplies, sales salaries, bad debt expenses, insurance expenses, and the miscellaneous office expenses.

Continuing expenses:

These are the expenses that would continue even the closure of any department.

Requirement 3:

We have to determine the reconciliation statement and its analysis.

Answer to Problem 6BPSB

Department Z's avoidable expenses of $181,960 are $6,960 greater than its revenues of $175,000. This means the company's annual net income would be $6,960 higher from eliminating Department Z. This analysis suggests management should probably go ahead with the elimination of the department as planned

Explanation of Solution

ESME COMPANY
Reconciliation of Combined Income with Forecasted Income
Combined net income	$ 48,600
Less Dept. Z's lost sales	(175,000)
Plus Dept. Z's eliminated expenses	181,960
Forecasted net income	$ 55,560

Department Z's avoidable expenses of $181,960 are $6,960 greater than its revenues of $175,000. This means the company's annual net income would be $6,960 higher from eliminating Department Z. This analysis suggests management should probably go ahead with the elimination of the department as planned