Chapter 25, Problem 6BPSB

To determine

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. Forecasted Annual income statement

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

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

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
Depreciation- Store equipment	21000		21000
Add: Allocated Expenses
Sales salaries	93600	46800	46800
Rent expenses	27600		27600
Bad debt expense	25000	4000	21000
Other salary	26000		26000
Insurance expenses	5600	910	4690
Misc. office expenses	4200	750	3450
Total expenses	826400	181960	644440

2. Forecasted annual income statement is as follows:

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.