retail co. has two dept\'s, indoor and outdoor. The co.\'s most recent monthly c
ID: 2354739 • Letter: R
Question
retail co. has two dept's, indoor and outdoor. The co.'s most recent monthly contribution format income statement is below:TOTAL OUTDOOR INDOOR
Sales: 4,900,000 1,500,000 3,400,000
Variable Exp's: 2,200,000 800,000 1,400,000
Contribution Margin: 2,700,000 700,000 2,000,000
Fixed Exp's: 2,400,000 800,000 1,600,000
Net Operating Income (loss) 300,000 (100,000) 400,000
A study indicates that $400,000 of the fixed exp's being charged to the Outdoor dept are sunk costs ,or allocated costs that will continue even if the Outdoor dept is dropped. In addition, the elimination of the Outdoor dept. would result ina 10% decrease in the sales of the Indoor department.
Ignore the impact of income taxes in your calculation.
If the Outdoor Department is dropped what will be the effect on the net operating income of the company as a whole? (Enter the amount as a negative number if the effect is a reduction in NOI)
Explanation / Answer
The revised income statement will be as follows: Revised income statement (If Outdoor is dropped) Sales 3060000 Less: Variable cost 1260000 Contribution Margin 1800000 Fixed expense 2000000 Net Oprating Income -200000 Revised income statement (If Outdoor is dropped) Sales 3060000 Less: Variable cost 1260000 Contribution Margin 1800000 Fixed expense 2000000 Net Oprating Income -200000Earlier there was a net Income of 300,000(Total), where as now with the the close of outdoor dept. the net income (Total) will come down to a loss of 200,000. The reason are as follows:
- There is increase in fixed expense, as part of outdoor deptt fixed expense are sunk cost. - There is a decrease in sales of Indoor deptt. Revised income statement (If Outdoor is dropped) Sales 3060000 Less: Variable cost 1260000 Contribution Margin 1800000 Fixed expense 2000000 Net Oprating Income -200000
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