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

ID: 2415218 • Letter: B

Question

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

Department

A study indicates that $380,000 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 18% 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?

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

Department

Total Hardware Linens Sales $ 4,320,000 $ 3,130,000 $ 1,190,000 Variable expenses 1,321,000 918,000 403,000 Contribution margin 2,999,000 2,212,000 787,000 Fixed expenses 2,330,000 1,490,000 840,000 Net operating income (loss) $ 669,000 $ 722,000 $ (53,000 )

Required:

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

in net operating income

Explanation / Answer

Operating statement if Linen Department closed:

Thus we see the change in net income is $ 345160 ie(669000-323840) unfavorable.

Total Hardware Dept Sales 2,566,600 2,566,600 Variable expenses 752,760 752,760 Contribution margin 1,813,840 1,813,840 Fixed expenses 1,490,000 1,490,000 Net operating income (loss) 323,840 323,840323

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

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

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