Posted: April 11th, 2016
Home 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 2011 departmental income statement shows the following.
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 sales clerks who each earn $600 per week, or $31,200 per year.
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; 73% of the insurance expense allocated to it to cover its merchandise inventory; and 24% of the miscellaneous office expenses presently allocated to it.
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