Bed & Bath, a retailing company, has two departments, Hardware and Linens. The c
ID: 2475040 • Letter: B
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 $371,000 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 19% 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?
DECREASE in net operating income (#)?
PLEASE EXPLAIN HOW YOU GOT THE ANSWER. THANKS!
Department
Total Hardware Linens Sales $ 4,120,000 $3,090,000 $1,030,000 Variable expenses 1,346,000 941,000 405,000 Contribution margin 2,774,000 2,149,000 625,000 Fixed expenses 2,300,000 1,440,000 860,000 Net operating income (loss) $ 474,000 $709,000 $(235,000 )Explanation / Answer
If the Linenns department is dropped it has a further expenditure of $ 371,000 which will decrease the net operatying income of a company as a whole. sunk cost is a cost that has already been incurred and thus cannot be recovered. Sunk cost is different from future costs that a business may face , such as inventory costs or R&D expenses, because it has already happend. Sunk costs are independent of any event that may occur in the future. The sunk cist incurred by linen department has a direct impact on the whole business which will result in decrease the net operating income of the company
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