Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent

Question

Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below: Total Bath Kitchen Bedding Sales $2,100,000 $1,000,000 $500,000 $600,000 Cost of goods sold (1,260,000) (500,000) (360,000) (400,000) Gross profit 840,000 500,000 140,000 200,000 Direct expenses (420,000) (200,000) (120,000) (100,000) Allocated expenses (325,000) (100,000) (150,000) (75,000) Net income (loss) $95,000 $200,000 ($130,000) $25,000 Based on this income statement, management is considering eliminating the Kitchen department. If the Kitchen department is eliminated, the other departments will expand to fill the space but sales are not expected to change. Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding. Part 1. Show an analysis indicating whether the Kitchen department should be eliminated

Explanation / Answer

If Kitchen Bedding department is eliminated:

At present lincome = 95000

If kitchen department is eliminated ,Income = 200000 - 120000+25000 = 105000

So Kitchen department shall be eliminated as total income will increase by (105000-95000) = 10000

sales 0 Less:cost of goods sold 0 Gross profit 0 Less:Direct expense 0 Less:Allocated expense [150000* (1-.20)] 120000 Loss -120000

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