Question

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 $437,000 $290,000 $727,000
Cost of goods sold 261,000 214,000 475,000
Gross profit 176,000 76,000 252,000
Operating expenses
Direct expenses
Advertising 15,500 10,500 26,000
Store supplies used 4,500 3,900 8,400
Depreciation-Store equipment 4,200 2,900 7,100
Total direct expenses 24,200 17,300 41,500
Allocated expenses
Sales salaries 65,000 39,000 104,000
Rent expense 9,400 4,780 14,180
Bad debts expense 9,400 7,300 16,700
Office salary 18,720 12,480 31,200
Insurance expense 1,500 700 2,200
Miscellaneous office expenses 2,400 1,600 4,000
Total allocated expenses 106,420 65,860 172,280
Total expenses 130,620 83,160 213,780
Net income (loss) $45,380 (7,160) 38,220
In analyzing whether to eliminate Department 200, management considers the following:
a. The company has one office worker who earns $600 per week, or $31,200 per year, and four salesclerks who each earn $600 per week or $31,200 per year for each salesclerk.
b. 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.
c. 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.
d. 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.
e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 68% of the insurance expense allocated to it to cover its merchandise inventory, and 17% of the miscellaneous office expenses presently allocated to it.
Prepare a forecasted annual income statement for the company reflecting the elimination of Department 200 assuming that it will not affect Department 100's sales and gross profit. The statement should reflect the reassignment of the office worker to one-half time as a salesclerk.

Answer 1

Net income or (Loss) = $43,128

Step-by-step explanation:

As per the data given in the question,

Elegant Decor Company

Forecasted annual income statement

Under plan to eliminate Department 200

Sales = $437,000

Cost of goods sold = $261,000

Gross profit = $176,000

Operating expense

Direct expenses:

Advertising = $15,500

Stores supplies used = $4,500

Depreciation- Stores Equipment = $4,200

Total Direct Expense = $24,200

Allocated Expenses :

Sales Salaries = $64,000

($104,000-2×$24,200+($31,200÷2) = $40,000)

(104,000-$40,000)

Rent Expenses = $14,180

Bad debt expense = $9,400

Office salary = $15,600

($31,200 - ($31,200 ÷ 2))

Insurance expense = $1,724

($2,200 - $476)

Miscellaneous expense = $3,728

($4,000 - $272)

Total Allocated Expenses = $108,632

Total Expense = $132,872

($108,632 + $24,200)

Net income or (Loss) = $43,128

($176,000 - $132,872)