Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen.

Question

Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. 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 the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 13% decrease in the sales of the Kitchen Department.

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

Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

Effect on the net operating income of the company as a whole due to dropping of bath department = Contribution from Bath department - Avoidable fixed costs + Loss of contribution from lost sales of kitchen department

=668000-(890000-377000)+2066000*13%

=423580

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