Bed & Bath, a retailing company, has two departments, Hardware and Linens. The c
ID: 2429757 • 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
Total Hardware Linens
Sales $ 4,080,000 $ 3,030,000 $ 1,050,000
Variable expenses 1,222,000 817,000 405,000
Contribution margin 2,858,000 2,213,000 645,000
Fixed expenses 2,210,000 1,340,000 870,000
Net operating income (loss) $ 648,000 $ 873,000 $ (225,000 )
A study indicates that $375,000 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 19% decrease in the sales of the Hardware Department.
Required:
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
Explanation / Answer
Departments Particulars Total Hardware Linens Sales $4080000 $3030000 $1050000 Less:Variable expenses $1222000 $817000 $405000 Contribution Margin $2858000 $2213000 $645000 Less:Fixed Expenses $2210000 $1340000 $870000 Net Operating Income/(loss) $648000 $873000 ($225000) If linen Department is closed then its lead to decrease of sales of harware department at 19%, and entire fixed expenses have to bare by hardware Department only Particulars Hardware Sales $2454300 Less:Variable expenses(.2696*2454300) $661679 Contribution Margin $1792621 Less:Fixed Expenses $2210000 Net Operating Income/(loss) ($417379) Note: 0.2696= 817000/3030000 Observations: Closing Down Of linens Department will result in Huge loss to the company i.e from proftibale company to losses company as a result huge loss of 417379 rather than profit of 648000. Advice: It is not advisable to close the linens department
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