Reference no: EM131816488

Problem - Eclectic 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 2009 departmental income statement shows the following:

ECLECTIC DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2009
	Dept. 100	Dept. 200	Combined
Sales	$446,000	$286,000	$732,000
Cost of goods sold	266,000	210,000	476,000
Gross profit	180,000	76,000	256,000
Operating expenses
Direct expenses
Advertising	16,000	12,500	28,500
Store supplies used	5,000	4,400	9,400
Depreciation-Store equipment	4,000	2,300	6,300
Total direct expenses	25,000	19,200	44,200
Allocated expenses
Sales salaries	52,000	31,200	83,200
Rent expense	9,490	4,760	14,250
Bad debts expense	9,500	7,500	17,000
Office salary	18,720	12,480	31,200
Insurance expense	2,100	1,300	3,400
Miscellaneous office expenses	2,100	1,500	3,600
Total allocated expenses	93,910	58,740	152,650
Total expenses	118,910	77,940	196,850
Net income (loss)	$61,090	$(1,940)	$59,150

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 $400 per week, or $20,800 per year.

b. The full salaries of two salesclerks are charged to Department 100. The full salary of one sales clerk 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; 66% of the insurance expense allocated to it to cover its merchandise inventory; and 17% of the miscellaneous office expenses presently allocated to it.

Required - Prepare a three-column report that lists items and amounts for (a) the company's total expenses (including cost of goods sold)-in column 1, (b) the expenses that would be eliminated by closing Department 200-in column 2, and (c) the expenses that will continue-in column 3.