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 Total Hardware Linens Sales $ 4,250,000 $ 3,070,000 $ 1,180,000 Variable expenses 1,326,000 926,000 400,000 Contribution margin 2,924,000 2,144,000 780,000 Fixed expenses 2,350,000 1,480,000 870,000 Net operating income (loss) $ 574,000 $ 664,000 $ (90,000 ) 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. Required: If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Explanation / Answer

Solution :

effect on the net operating income if Linens Department is dropped

Total

Contribution margin 2144000*(1-0.12)

1886720

Fixed expenses (1480000+377000)

1857000

Net operating income (loss)

29720

Decrease in profits for the company as a whole (574000-29720)

544280

effect on the net operating income if Linens Department is dropped

Total

Contribution margin 2144000*(1-0.12)

1886720

Fixed expenses (1480000+377000)

1857000

Net operating income (loss)

29720

Decrease in profits for the company as a whole (574000-29720)

544280

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