Saul’s Company’s management is trying to decide whether

Relevant CostSaul’s Company’s management is trying to decide whether to eliminate Department Z, which hasproduced low profits or losses for several years. The company’s 2014 departmental incomestatement shows the following.Saul CompanyDepartmental Income StatementFor year ended December 31, 2014SalesCost of goods soldGross profitOperating expensesAdvertisingStore supplies usedDepreciation – storeTotal direct expenseAllocated expensesSales salariesRent expenseBad debtsOffice salaryInsurance expenseMiscellaneous officeexpenseTotal allocatedexpenseTotal expensesNet incomeDepartment A$350,000230,650119,350Department Z$87,50062,55024,950Combined$437,500293,200144,30013,5002,8007,00023,3001,5007003,5005,70015,0003,50010,50029,00035,10011,04010,50010,4002,10085011,7002,7602,0002,6007001,25046,80013,80012,50013,0002,8002,10069,99021,01091,00093,29026,06026,710(1,760)120,00024,300In 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 peryear 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 salaryof one salesclerk is charged to Department Z.c. Eliminating Department Z would avoid the sales salaries and the office salarycurrently allocated to it. However, management prefers another plan. Twosalesclerks have indicated that they will be quitting soon. Management believesthat their work can be done by the two remaining clerks if the one office workerworks in sales half-time. Eliminating Department Z will allow this shift of duties. Ifthis change is implemented, half the office worker’s salary would be reported assales 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 byDepartment Z.e. Closing Department Z will eliminate its expenses for advertising, bad debts, andstore supplies; 65% of the insurance expense allocated to it to cover itsmerchandise inventory; and 30% of the miscellaneous office expenses presentlyallocated to it.Required1. Prepare a three-column report that lists items and amounts for (a) the company’stotal expenses (including cost of goods sold)—in column 1, (b) the expenses thatwould be eliminated by closing Department Z—in column 2, and (c) the expensesthat will continue—in column 3.2. Prepare a forecasted annual income statement for the company reflecting theelimination of Department Z assuming that it will not affect Department A’s salesand gross profit. The statement should reflect the reassignment of the officeworker to one-half time as a salesclerk.