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Part 1 Analysis of Expenses under Elimination of Department X-(Answered)

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Question

Part 1

Analysis of Expenses under Elimination of Department X

Total

Eliminated

Continuing

Expenses

Expenses

Expenses

Cost of goods sold...............................

$? 938,000

$414,000

$524,000

Direct expenses

? Advertising.........................................

58,000

24,000

34,000

? Store supplies used...........................

15,600

7,600

8,000

? Depreciation?Store equipment.........

16,600

16,600

Allocated expenses

? Sales salaries*....................................

208,000

104,000

104,000

? Rent expense......................................

28,320

28,320

? Bad debts expense.............................

36,000

16,200

19,800

? Office salary*.....................................

62,400

62,400

? Insurance expense*............................

6,200

1,540

4,660

? Miscellaneous office expenses*.........

???????? 8,000

???????? 800

????? 7,200

Total expenses.....................................

$1,377,120

$568,140

$808,980

*Computation notes.?? Closing Department X will eliminate 70% of its insurance expense and 25% of its miscellaneous office expense.? Sales salaries will be reduced by the amounts paid to the two clerks who will not be replaced.? The office salary will not be eliminated, but it will be reclassified so that one-half will be reported as sales salary and one-half as office salary.


Part 2

? COMPANY

Forecasted Annual Income Statement

Under Plan to Eliminate Department 200

Sales..........................................................

$872,000

Cost of goods sold.....................................

? 524,000

Gross profit from sales..............................

348,000

Operating expenses

Advertising..............................................

34,000

Store supplies used.................................

8,000

Depreciation of store equipment.............

16,600

Sales salaries...........................................

135,200*

Rent expense...........................................

28,320

Bad debts expense...................................

19,800

Office salary.............................................

31,200*

Insurance expense...................................

4,660

Miscellaneous office expenses................

????? 7,200

Total operating expenses...........................

? 284,980

Net income.................................................

$? 63,020

?* Office salary reassignment

Total

Sales

Office

Salaries

Salaries

Salary

Salesclerks.......................................................

$104,000

$104,000

Office worker...................................................

62,400

$62,400

Reassign office worker to sales....................

???????????? 0

??? 31,200

(31,200)

Revised salaries..............................................

$166,400

$135,200

$31,200


Part 3

?. COMPANY

Reconciliation of Combined Income with Forecasted Income

Combined net income ......................................................

$? 74,880

Less Dept.X's lost sales....................................................

(580,000)

Plus Dept.X?s eliminated expenses...................................

? 568,140

Forecasted net income.....................................................

$? 63,020

Analysis

Department X's avoidable expenses of $568,140 are $11,860 less than its revenues of $580,000.? This means the company's annual net income would be $11,860 less from eliminating Department X.? This analysis suggests the department should not be eliminated.



Part 1

 

Analysis of Expenses under Elimination of Department X

 

Total

 

Expenses

 


 

Eliminated

 

Expenses

 


 

Continuing

 

Expenses

 


 

Cost of goods sold...............................................

 

$ 938,000

 


 

$414,000

 


 

$524,000

 


 

Direct expenses

 

Advertising..........................................................

 

58,000

 


 

24,000

 


 

34,000

 


 

Store supplies used...........................................

 

15,600

 


 

7,600

 


 

8,000

 


 

Depreciation?Store equipment........................

 

16,600

 

Allocated expenses

 

Sales salaries*....................................................

 

208,000

 


 

16,600

 

104,000

 


 

Rent expense......................................................

 

28,320

 

Bad debts expense.............................................

 

36,000

 


 

104,000

 

28,320

 


 

16,200

 


 

Office salary*......................................................

 

62,400

 


 

19,800

 

62,400

 


 

Insurance expense*............................................

 

6,200

 


 

1,540

 


 

4,660

 


 

Miscellaneous office expenses*.......................

 

8,000

 


 

800

 


 

7,200

 


 

Total expenses......................................................

 

$1,377,120

 


 

$568,140

 


 

$808,980

 


 

*Computation notes. Closing Department X will eliminate 70% of its insurance

 

expense and 25% of its miscellaneous office expense. Sales salaries will be

 

reduced by the amounts paid to the two clerks who will not be replaced. The

 

office salary will not be eliminated, but it will be reclassified so that one-half will

 

be reported as sales salary and one-half as office salary.

 


 

Part 2

 

? COMPANY

 

Forecasted Annual Income Statement

 

Under Plan to Eliminate Department 200

 

Sales......................................................................

 


 

$872,000

 


 

Cost of goods sold...............................................

 


 

524,000

 


 

Gross profit from sales........................................

 


 

348,000

 


 

Operating expenses

 

Advertising.........................................................

 


 

34,000

 


 

Store supplies used...........................................

 


 

8,000

 


 

Depreciation of store equipment......................

 


 

16,600

 


 

Sales salaries.....................................................

 


 

135,200*

 


 

Rent expense......................................................

 


 

28,320

 


 

Bad debts expense............................................

 


 

19,800

 


 

Office salary........................................................

 


 

31,200*

 


 

Insurance expense.............................................

 


 

4,660

 


 

Miscellaneous office expenses........................

 


 

7,200

 


 

Total operating expenses....................................

 


 

284,980

 


 

Net income............................................................

 

$ 63,020

 


 

* Office salary reassignment

 

Total

 

Sales

 

Salaries

 

Salaries

 

Salesclerks.........................................................................

 

$104,000

 

$104,000

 

Office worker......................................................................

 

62,400

 

Reassign office worker to sales.......................................

 

0

 

31,200

 

Revised salaries.................................................................

 

$166,400

 

$135,200

 


 

Office

 

Salary

 

$62,400

 

(31,200)

 

$31,200

 


 

Part 3

 

?. COMPANY

 

Reconciliation of Combined Income with Forecasted Income

 

Combined net income .........................................................

 


 

$ 74,880

 


 

Less Dept.X's lost sales......................................................

 


 

(580,000)

 


 

Plus Dept.X?s eliminated expenses....................................

 


 

568,140

 


 

Forecasted net income........................................................

 


 

$ 63,020

 


 

ANALYSIS

 

Department X's avoidable expenses of $568,140 are $11,860 less than its

 

revenues of $580,000. This means the company's annual net income would

 

be $11,860 less from eliminating Department X. This analysis suggests the

 

department should not be eliminated.

 


 

 

Paper#9209908 | Written in 27-Jul-2016

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