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

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 $ 4,100,000 $ 3,020,000 $ 1,080,000 Variable expenses 1,351,000 938,000 413,000 Contribution margin 2,749,000 2,082,000 667,000 Fixed expenses 2,270,000 1,450,000 820,000 Net operating income (loss) $ 479,000 $ 632,000 $ (153,000 ) 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 11% decrease in the sales of the Hardware Department.

Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Loss in contribution margin of hardware department -667000 Loss in contribution margin of Linens department -229020 =2082000*11% Avoidable fixed costs 445000 =820000-375000 Net change -451020 Financial (disadvantage) ($451020)

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