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 $371,000 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 14% 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? (Input the amount as a positive value.)

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

Elimation bath Department:

Fixed cost to be continue=$371,000

so Loss in bath department due to elimination of bath department=$371,000

the elimination of the Bath Department would result in a 14% decrease in the sales of the Kitchen Department

so decrease saes in Kitchen department=$3,170,000*14%=$443,800

Contribution Ratio=Contribution margin*100/Sales=$2,369,000*100/$3,170,000=74.73%

operating income due to decrease in sales-in kitchen department=$443,800*74.73%=$331,652

Total decrese in net operating income=$371,000+$331,652=$702,652

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