Minicase 7 Relevant Cost Saul’s Company's

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Minicase 7

Relevant Cost

Saul’s Company's management is trying to decide whether to eliminate Department Z, which has

produced low profits or losses for several years. The company's 2014 departmental income

statement shows the following.

Saul Company

Departmental Income Statement

For year ended December 31, 2014

Department A Department Z Combined

Sales $350,000 $87,500 $437,500

Cost of goods sold 230,650 62,550 293,200

Gross profit 119,350 24,950 144,300

Operating expenses

Advertising 13,500 1,500 15,000

Store supplies used 2,800 700 3,500

Depreciation – store 7,000 3,500 10,500

Total direct expense 23,300 5,700 29,000

Allocated expenses

Sales salaries 35,100 11,700 46,800

Rent expense 11,040 2,760 13,800

Bad debts 10,500 2,000 12,500

Office salary 10,400 2,600 13,000

Insurance expense 2,100 700 2,800

Miscellaneous office

expense

850 1,250 2,100

Total allocated

expense

69,990 21,010 91,000

Total expenses 93,290 26,710 120,000

Net income 26,060 (1,760) 24,300

In analyzing whether to eliminate Department Z, management considers the following items:

a. The company has one office worker who earns $ 250 per week or $ 13,000 per

year and four salesclerks who each earn $ 225 per week or $ 11,700 per year.

b. The full salaries of three salesclerks are charged to Department A. The full salary

of one salesclerk is charged to Department Z.

c. Eliminating Department Z 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 two remaining clerks if the one office worker 

works in sales half-time. Eliminating Department Z 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 A will use the space and equipment currently used by

Department Z.

e. Closing Department Z will eliminate its expenses for advertising, bad debts, and

store supplies; 65% of the insurance expense allocated to it to cover its

merchandise inventory; and 30% of the miscellaneous office expenses presently

allocated to it.

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 Z—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 Z assuming that it will not affect Department A's sales

and gross profit. The statement should reflect the reassignment of the office

worker to one-half time as a salesclerk.

  • 9 years ago
Minicase 7 Relevant Cost Saul’s Company's
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