Q 1)
Vortex Company operates a retail store with two departments. Information about those departments Problem 9-4A follows.
Departmental
contribution to income
P3
Department A Department B
Sales . . . . . . . . . . . . . . . . . . . . . $800,000 $450,000
Cost of goods sold . . . . . . . . . 497,000 291,000
Direct expenses
Salaries . . . . . . . . . . . . . . . . . 125,000 88,000
Insurance . . . . . . . . . . . . . . . 20,000 10,000
Utilities . . . . . . . . . . . . . . . . . 24,000 14,000
Depreciation . . . . . . . . . . . . 21,000 12,000
Maintenance . . . . . . . . . . . . . 7,000 5,000
Chapter 9 Performance Measurement and Responsibility Accounting 381
Indirect costs are allocated as follows: salaries on the basis of sales; insurance and depreciation on the
basis of square footage; and office expenses on the basis of number of employees. Additional information
about the departments follows.
The company also incurred the following indirect costs.
Salaries . . . . . . . . . . . . . . . . $36,000
Insurance . . . . . . . . . . . . . . 6,000
Depreciation . . . . . . . . . . . 15,000
Office expenses . . . . . . . . . 50,000
Department Square footage Number of employees
A . . . . . . . . . 28,000 75
B . . . . . . . . . 12,000 50
Required
1. For each department, determine the departmental contribution to overhead and the departmental net
income.
2. Should Department B be eliminated? Explain.
Q2) 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 2015 departmental income statements
show the following
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $436,000 $290,000 $726,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 262,000 207,000 469,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,000 83,000 257,000
Operating expenses
Direct expenses
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 12,000 29,000
Store supplies used . . . . . . . . . . . . . . . . . . . 4,000 3,800 7,800
Depreciation—Store equipment . . . . . . . . . 5,000 3,300 8,300
Total direct expenses . . . . . . . . . . . . . . . . . . 26,000 19,100 45,100
Allocated expenses
Sales salaries . . . . . . . . . . . . . . . . . . . . . . . . 65,000 39,000 104,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . 9,440 4,720 14,160
Bad debts expense . . . . . . . . . . . . . . . . . . . 9,900 8,100 18,000
Office salary . . . . . . . . . . . . . . . . . . . . . . . . 18,720 12,480 31,200
Insurance expense . . . . . . . . . . . . . . . . . . . 2,000 1,100 3,100
Miscellaneous office expenses . . . . . . . . . . 2,400 1,600 4,000
Total allocated expenses . . . . . . . . . . . . . . . 107,460 67,000 174,460
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,460 86,100 219,560
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 40,540 $ (3,100) $ 37,440
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 2015 departmental income statements
show the following.
Problem 10-6A
Analysis of possible
elimination of a
department
A1
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 $500 per week, or $26,000 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; 70%
of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous
office expenses presently allocated to it.
Chapter 10 Relevant Costing for Managerial Decisions 413
Check (1) Total expenses:
(a) $688,560, (b) $284,070
(2) Forecasted net
income without Department
200, $31,510
Required
1. 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.
2. 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.
Analysis Component
3. Reconcile the company’s combined net income with the forecasted net income assuming that
Department 200 is eliminated (list both items and amounts). Analyze the reconciliation and explain
why you think the department should or should not be eliminated.
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