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: 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 13% 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

Explanation / Answer

If Linen depatment dropped the new Income Statement Amount   $ Sales (13% less of hardware) 2775300 Less: variable Expenses (13% less) 702960 Contribution 2072340 Less: fixed Expenses (1430000+377000) 1807000 Net Operating Income 265340 Previously Total operating Income 867000 So Decrease in Net Operating Income $601660 Ans One more way to do the question Contribution Loss from Linen 735000 saving in Fixed Cost 820000-377000 443000 Loss from Linen 292000 Contribution loss of hardware 2382000*13% 309660 Total Decrease in Income Linene is not produced 601660 Ans

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