Question

Suresh Co. expects its five departments to yield the following income for next year.

Sales Expenses Avoidable Unavoidable Total expenses Net income (loss)

Dept. N Dept. O Dept. P Dept. T Total

\(63,000 \) 35,000

9,800

51,800

61,600

36,400

12,600

49,000

\((14,000)

\)56,000

22,400

4,200

26,600

\(29,400

\)42,000

14,000

29,400

43,400

28,000

37,800

9,800

47,600

\((19,600)

Dept. M

\) \(224,000

120,400

107,800

228,200

\) 1,400 \( (1,400) \) (4,200)

A B C D E F G

1 2 3 4 5 6 7

Recompute and prepare the departmental income statements (including a combined total column) for thecompany under each of the following separate scenarios: Management (1) eliminates departments withexpected net losses and (2) eliminates departments with sales dollars that are less than avoidable expenses.Explain your answers to parts 1 and 2.

Short answer

The net income of the company when a department with less sales than avoidable expenses is eliminated is $7,000.

Step-by-step solution

Definition of avoidable expenses

Avoidable expenses are those expenses that can be avoided by not performing a particular activity.

Departments with expected net losses eliminated

Departments with expected net losses eliminated
	Dept. M	Dept. N	Debt. O	Dept. P	Dept. T	Total
Sales	$63,000		$56,000			$119,000
Expenses:
Avoidable	$9,800		$22,400			$32,200
Unavoidable	$51,800	$12,600	$4,200	$29,400	$9,800	$107,800
Total Expenses	$61,600	$12,600	$26,600	$29,400	$9,800	$140,000
Net Income (loss)	$1,400	($12,600)	$29,400	($29,400)	($9,800)	($21,000)

Department with less sales than avoidable expenses eliminated

Departments with less Sales Than Avoidable Expenses Eliminated
	Dept. M	Dept. N	Debt. O	Dept. P	Dept. T	Total
Sales	$63,000		$56,000	$42,000		$161,000
Expenses:
Avoidable	$9,800		$22,400	$14,000		$46,200
Unavoidable	$51,800	$12,600	$4,200	$29,400	$9,800	$107,800
Total Expenses	$61,600	$12,600	$26,600	$43,400	$9,800	$154,000
Net Income (loss)	$1,400	($12,600)	$29,400	($1,400)	($9,800)	$7,000