Minicase 7 Relevant Cost Saul’s Company's
truecolorsMinicase 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
Purchase the answer to view it
- minicase_7_relevant_cost_sauls_companys.xlsx