Universal Solar Ltd operates three departments — a lighting department, a water heating department, and an equipment department. The store’s accountant has prepared an income statement by department for the year ended 30 June 2018 and, for the third year in a row, the equipment department has shown a loss.

If the company decides to shut down the unprofitable department, 30% of the space occupied by the equipment department will be used by the lighting department and 30% will be used by the water heating department. The other 40% of the space will no longer be rented by Universal Solar Ltd. The company does not believe that eliminating the equipment department and at the same time enlarging the remaining two departments will change the sales or gross profits of the lighting and water heating departments.

The accountant has also provided the following information.

1. At present, there are three salespeople and a manager in the equipment department. If the department is eliminated, the manager would be transferred to the lighting department and the three salespeople’s employment would be terminated. The manager’s salary is $52 000 per year.

2. Electricity, rent and insurance are allocated on the basis of floor space. The insurance would decrease $4000 a year if the department is eliminated; the rent and electricity would decrease by 40% of equipment department expense in line with the area given up.

3. Indirect advertising expenses of $60 000 were allocated to the departments on the basis of sales. The direct advertising expenditures incurred by the equipment department would be eliminated.

4. The equipment in the equipment department would be transferred to the other departments — 40% to the lighting department and 20% to the water heating department and the other 40% would be scrapped.

5. The managing director’s salary of $60 000 p.a. has been allocated equally over the departments.

	Universal solar LTD Income Statement for the year ended 30 June 2018
		Lighting		Water heating		Equipment		Total
	INCOME Sales Less: Cost of sales	$766 000 306 400		$459 600 206 820		$306 400 107 240		$1 532 000    620 460
	GROSS PROFIT	459 600		252 780		199 160		911 540
	EXPENSES Salaries Electricity Advertising Rent on building Depreciation on equipment Insurance	144 990 14 700 126 280 28 700 31 570     9 555		74 410 14 700 78 470 28 700 23 450     9 555		80 950 12 600 86 590 24 600 19 840     8 190		300 350 42 000 291 340 82 000 74 860     27 300
	Total expenses	355 795		229 285		232 770		817 850
	PROFIT (LOSS)	$103 805		$23 495		$(33 610)		$   93 690

Required

A. Should the equipment department be closed down? What would be the impact on company total profit if it is eliminated?

B. Prepare a departmental income statement that would result if the equipment department is dropped.