This question is from chapter 12 of Managerial Accounting 16 th edition by Ray G

Question

This question is from chapter 12 of Managerial Accounting 16th edition by Ray Garrison.

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 Department Total Hardware Linens Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) $ 4,210,000 $ 3,010,000 $ 1,200,000 404,000 796,000 830,000 1,241,000 2,969,000 2,173,000 2,330,000 1,500,000 837,000 $ 639,000 $ 673,000 $ (34,000) 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 17% decrease in the sales of the Hardware Department. What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Contribution margin lost if the Linens Department is dropped: Lost from the Linens Department $404,000 Lost from the Hardware Department (17% × $837,000) $142,290 Total lost contribution margin $546,290 Less fixed costs that can be avoided ($830,000 – $380,000) $450,000 Decrease in profits for the company as a whole $96,290

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