Boyles Home Center, a retailing company, has two departments, Bath and Kitchen.

ID: 2388320 • Letter: B

Question

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

Departments: Bath Kitchen
Sales: Total $ 4,220,000 Bath $ 1,070,000 Kitchen $3,150,000
Variable expenses: Total $1,326,000 Bath $415,000 Kitchen:$911,000

Contribution margin: Total: $2,894,000 Bath:$655,000 Kitchen $2,239,000
Fixed expenses: Total: $2,160,000 Bath: $860,000 Kitchen:$1,300,000

Net operating income (loss): Total: $ 734,000 bath: $ (205,000 ) Kitchen: $ 939,000

A study indicates that $378,000 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.

Required:

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.)

in net operating income $

What I did:

Contribution Margin of Bath - (Contribution Margin of Kitchen*14%) to get total lost contribution margin = 655000 - 313460= 341540
Then I subtracted the less avoidable fixed costs ($860000 - 378000)= 482000
Then I subtract 341540 and 482000 = -140460.

This is decrease in overal net operating income $-140460.

IS THIS RIGHT? THANKS.

Explanation / Answer

Keep Bath

Drop Bath

Net income increase/(decrease)

Sales

4,220,000

2,709,000

(1,511,000)

Variable Expense

1,326,000

783,460

542,540

Contribution Margin

2,894,000

1,925,540

(968,460)

Fixed Expenses

2,160,000

1,678,000

482,000

Net Operating Income

734,000

247,540

(468,460)

Net income will decrease by 468,460 if they drop bath. 378,000 fixed costs are not

the avoidable part. 378,000 are the fixed costs of the bath department that will

continue even if the bath department is dropped.