Boyle%u2019s Home Center, a retailing company, has two departments, Bath and Kit

Question

Boyle%u2019s Home Center, a retailing company, has two departments, Bath and Kitchen. The company%u2019s most recent monthly contribution format income statement follows:

A study indicates that $376,000 of the fixed expenses being charged to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 14% decrease in the sales of the Kitchen Department.

If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole?

Decrease in net operating income by $_____

Explanation / Answer

Current Loss from bath department is -50,000.

In case its dropped.

Lose = 376000 of fixed costs + 14% of contribution margin of kitchen

= 376000 + 0.14 * 2210000 = 685,400

Hence the decrease is 685,400 - 50,000 = 635,400

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