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:

Department

A study indicates that $370,000 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 10% 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? (Input the amount as a positive value. Omit the "$" sign in your response.)

Department

Total Bath Kitchen   Sales $ 5,000,000 $ 1,000,000 $ 4,000,000   Variable expenses 1,900,000 300,000 1,600,000   Contribution margin 3,100,000 700,000 2,400,000   Fixed expenses 2,700,000 900,000 1,800,000   Net operating income (loss) $ 400,000 $ (200,000 ) $ 600,000

Explanation / Answer

Bath Department contribution margin lost (100%) ($700,000) Kitchen Department contribution margin lost (10%) (240,000) Avoidable fixed cost saved by closing Bath Department 530,000 Decrease in net operating income if Bath Department is closed ($410,000)

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