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

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 $377,000 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 12% 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:

Explanation / Answer

Department Hardware Workings Add (Deduct) Total Sales 3,050,000 -366000 (12% reduction in sales) 2,684,000 Variable expenses 970,000 -116400 (12% reduction in Variable cost) 853,600 Contribution margin 2,080,000 2,080,000 Fixed expenses 1,480,000 377000 (Allocation of fixed expense) 1,857,000 Net operating income (loss) 600,000 223,000

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