

Answer to Problem 6BPSB
Introduction
Eliminated expenses are closed as soon as the department to which it belongs is closed; whereas the continuing expenses are those which will continue to be in existence even after the closure of the department.
To Determine
1. Three-column report showing total expenses, eliminated expenses and continuing expenses
2.
3. To reconcile the company’s combined net income with the forecasted net income and analyze.
Solution
1. The three-column report is shown in the explanation section.
2. Forecasted annual income statement is shown in the explanation section.
3.
ESME Company | ||
Particulars | Amount (in $) |
Combined net income | 48600 |
Add: Eliminated expenses of Department Z | 181960 |
Less: Loss in sales on Department Z | -175000 |
Forecasted net income | 55560 |
Explanation of Solution
1.The three-column report is as follows:
ESME Company | |||
Analysis of expenses under elimination of Department Z | |||
Particulars | Total expenses (in $) | Eliminated Expenses (in $) | Continuing Expenses (in $) |
Cost of goods sold | 586400 | 125100 | 461300 |
Add: Direct Expenses | |||
Advertising expenses | 30000 | 3000 | 27000 |
Store Supplies used | 7000 | 1400 | 5600 |
| 21000 | 21000 | |
Add: Allocated Expenses | |||
Sales salaries | 93600 | 46800 | 46800 |
Rent expenses | 27600 | 27600 | |
| 25000 | 4000 | 21000 |
Other salary | 26000 | 26000 | |
Insurance expenses | 5600 | 910 | 4690 |
Misc. office expenses | 4200 | 750 | 3450 |
Total expenses | 826400 | 181960 | 644440 |
2.
ESME Company | ||
Forecasted annual income statement | ||
Under plan to eliminate Department Z | ||
Particulars | Amount (in $) | Amount (in $) |
Sales | 700000 | |
Less: Cost of goods sold | 461300 | |
Gross Profit(A) |
| 238700 |
Add: Direct Expenses | ||
Advertising expenses | 27000 | |
Store Supplies used | 5600 | |
Depreciation- Store equipment | 21000 | |
Sales salaries | 59800 | |
Rent expenses | 27600 | |
Bad debt expense | 21000 | |
Other salary | 13000 | |
Insurance expenses | 4690 | |
Misc. office expenses | 3450 | |
Total expenses(B) |
| 183140 |
Net Income (A-B) |
| 55560 |
The calculation of revised salaries in case of sales and administrative workers are as follows:
Particulars | Total salaries(in$) | Sales salaries (in $) | Office Salary (in $) |
Sales – Clerks | 46800 | 46800 | |
Administrative worker | 26000 | 0 | 26000 |
Reassignment of Administrative Worker to sales | 0 | 13000 | -13000 |
Revised salaries | 72800 | 59800 | 13000 |
3.The reconciliation of company’s net income with the forecasted income is as follows:
ESME Company
Reconciliation Statement of Combined Income with Forecasted Income
Particulars | Amount (in $) |
Combined net income | 48600 |
Add: Eliminated expenses of Department Z | 181960 |
Less: Loss in sales on Department Z | -175000 |
Forecasted net income | 55560 |
Analysis
Here, we come across the fact that the revenue earned by Department Z is 175000$ when compared to its eliminated expenses of $181960 which amounts to $6960 that could be avoided. Therefore, we can conclude that the company's annual net income may increase by $6960 by eliminating Department Z. The management should go ahead with the decision to earn profits.
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