Bed & Bath, a retailing company, has two departments, Hardware and Linens. The c

Question

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows:

1,299,000

888,000

411,000   

$601,000

$802,000

$(201,000)

A study indicates that $373,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 17% decrease in the sales of the Hardware Department.

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole? (Input the amount as positive value.)

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows:

Explanation / Answer

According to the given information, If the Hardware sales drop by 17%, then the contribution margin will also drop by 17% Contribution margin dropped for Hardware = 17% ($2,272,000)                                                                   = $386,240                                                    Therefore, the revised contribution margin for Hardware is $1,885,760 Since the fixed costs does not change, the Net income will not drop by 17% Revised Net operating income for Hardware = $1,885,760 - $1,470,000                                                                     = $415,760 Therefore,the net operating income for Hardware is $415,760 Dropping Linens will lose Contribution margin of $649,000 but will save fixed costs of $477,000 Fixed costs incurred for Linens is $373,000 if the department is dropped. Fixed costs saved for Linen = $850,000 - $373,000                                           = $477,000 The loss in the net income for Linens would be Loss in net income for Linens = Loss of contribution margin - Fixed costs saved                                              = $649,000 - $477,000                                              = $172,000 Howevere, the Contribution margin for Hardware will drop by $386,240 Total loss in net income as a whole = $386,240 + $172,000                                                      = $558,240 Therefore, the net income has dropped an amount of $42,760 from the original $601,000.

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