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

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 17% 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?

a) increase or b) decrease in net operating income $___?____

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

b decrease

-61310

Total Hardware   Sales 2506600 2506600   Variable expenses 810910 810,910 0   Contribution margin 1695690 1,695,690   Fixed expenses 1757000 1,757,000 0   Net operating income (loss) -61310 -61,310

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