Exercise 12-17 Dropping or Retaining a Segment [LO12-2] Bed & Bath, a retailing

Question

Exercise 12-17 Dropping or Retaining a Segment [LO12-2] Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Departent TotalHardware Linens Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) 4,250,0003,100,000 1.150,000 940,000416,000 2,894,000 2,160,000 734,000 810,000 634.000 $ 710,000(76, 000) 1.356.0004000416000 2,260,000 .450,000 A study indicates that $376,000 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 Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Financial advantage/ Dsiadvantage of discontinuing Linen: Continue Discontinue Net income Inc/ Decrease Sales 4250000 2573000 -1677000 Less: Varaible expense 1356000 780200 575800 Contribution 2894000 1792800 -1101200 Fixed expense 2260000 1826000 434000 Net operating income 634000 -33200 -667200 Net Financial disadvantage of discontinuance: ($ 667200) Note: Sales of hardware will be $ 2573000 (i.e. 3100000-17%) variable cost is $ 780200 (i.e. 940000-17%)

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