retail store with two departments

Read Problem 9-4A in your textbook and answer the questions that follow. Your response should be 4 to 6 pages long, including attachments and follow APA format.

Also read Problem 10-6A in your textbook and answer the questions that follow. Your response should be 2-3 pages long, including attachments and follow APA format

Vortex Company operates a retail store with two departments. Information about those departments follows.

The company also incurred the following indirect costs.

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.


1. For each department, determine the departmental contribution to overhead and the departmental net

income.                   —  Check (1) Dept. A net income, $38,260

2. Should Department B be eliminated? Explain.

Problem 10-6A:

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.

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.


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. —-Check (1) Total expenses: (a) $688,560, (b) $284,070

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. —–(2) Forecasted net income without Department 200, $31,510

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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