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Elegant Decor Company’s Management Assignment | Top Universities

Elegatn Décor Company
Forecasted annual income statement
Under plan to eliminate Department 200
Particulars Amount
Sales $4,36,000.00
Cost of goods sold $2,62,000.00
Gross Profit $1,74,000.00
Operating Expenses:
Advertising $17,000.00
Store supplies used $4,000.00
Depreciation – Store Equipment $8,300.00
Sales Salaries $67,600.00
Rent Expense $14,160.00
Bad debts expense $9,900.00
Office salary $15,600.00
Insurance Expense $2,330.00
Miscellaneous office expense $3,600.00
Total operating expenses $1,42,490.00
Net Operating Income $31,510.00

Required information

Problem 23-6A Analysis of the possible elimination of a department LO A1

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Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2017 departmental income statements show the following.

ELEGANT DECOR COMPANY
Departmental Income Statements
For Year Ended December 31, 2017
Dept. 100 Dept. 200 Combined
Sales $ 436,000 $ 290,000 $ 726,000
Cost of goods sold 262,000 207,000 469,000
Gross profit 174,000 83,000 257,000
Operating expenses
Direct expenses
Advertising 17,000 12,000 29,000
Store supplies used 4,000 3,800 7,800
Depreciation—Store equipment 5,000 3,300 8,300
Total direct expenses 26,000 19,100 45,100
Allocated expenses
Sales salaries 65,000 39,000 104,000
Rent expense 9,440 4,720 14,160
Bad debts expense 9,900 8,100 18,000
Office salary 18,720 12,480 31,200
Insurance expense 2,000 1,100 3,100
Miscellaneous office expenses 2,400 1,600 4,000
Total allocated expenses 107,460 67,000 174,460
Total expenses 133,460 86,100 219,560
Net income (loss) $ 40,540 $ (3,100 ) $ 37,440

In analyzing whether to eliminate Department 200, management considers the following:

  1. The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each earn $500 per week, or $26,000 per year for each salesclerk.
  2. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments.
  3. Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon. Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is implemented, half the office worker’s salary would be reported as sales salaries and half would be reported as office salary.
  4. The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200.
  5. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 70% of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous office expenses presently allocated to it.

Problem 23-6A Part 3

Analysis Component
3. Reconcile the company’s combined net income with the forecasted net income assuming that Department 200 is eliminated (list both items and amounts). (Amounts to be deducted should be indicated by a minus sign.)

Elegant Decor Company Analysis of Expense under Elimination of Department 200 Continuing Expense $262,000 Particulars Eliminate Dept 200 $207,000 Total Cost of Good Sold

(A) $469,000 Direct Expense

(B) Advertising Store Supplies Used Depreciation Store Equipment $29,000 $7,800 $8,300 $12,000 $17,000 $4,000 $8,300 $3,800 $0 $45,100 $15,800 $29,300 (B) Allocated Expense (

C) Sales Salaries Note (a) $104,000 $14,160 $18,000 $31,200 $3,100 $4,000 $36,400 $67,600 $14,160 $9,900 15,600 Rent Expense S0 Bad Debt Expense $8,100 $15,600 Office Salary Insurance Expense Note (b) Miscellaneous Office Expense Note (c) $770 $2,330 $400 $3,600 $174,460 $61.270 $113.190 (C) Total Expense (A)+(B)+(C) $688.560 $284,070 $404,490 Working $104,000 Note (a) Total Sales Salaries Less 2 Sales clerk will work Department 100 [$26000 x 2] ($52,000) 50% of Office clerk Sales work [$31200/2] ($15,600) ($67,600) $36,400 Sales Salary Eliminated $1,100 Note (b) Insurance Expense allocated to Department 200 Eliminated 70 % [ $1100 x 70 % ) $770 $1,600 Note (c) Miscellaneous Office Expense allocated to Department 200 Eliminated 25% [$1600 x 25 %] $400.

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