|Elegatn Décor Company|
|Forecasted annual income statement|
|Under plan to eliminate Department 200|
|Cost of goods sold||$2,62,000.00|
|Store supplies used||$4,000.00|
|Depreciation – Store Equipment||$8,300.00|
|Bad debts expense||$9,900.00|
|Miscellaneous office expense||$3,600.00|
|Total operating expenses||$1,42,490.00|
|Net Operating Income||$31,510.00|
Problem 23-6A Analysis of the possible elimination of a department LO A1
[The following information applies to the questions displayed below.]
Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2017 departmental income statements show the following.
|ELEGANT DECOR COMPANY
Departmental Income Statements
For Year Ended December 31, 2017
|Dept. 100||Dept. 200||Combined|
|Cost of goods sold||262,000||207,000||469,000|
|Store supplies used||4,000||3,800||7,800|
|Total direct expenses||26,000||19,100||45,100|
|Bad debts expense||9,900||8,100||18,000|
|Miscellaneous office expenses||2,400||1,600||4,000|
|Total allocated expenses||107,460||67,000||174,460|
|Net income (loss)||$||40,540||$||(3,100||)||$||37,440|
In analyzing whether to eliminate Department 200, management considers the following:
- 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.
- 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.
- 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.
- 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.
- 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
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.
Get Accounting Homework Help Today.