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 $378,000 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 14% 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

Decision of discontinuing the linen department is not correct there is a decrease in net operating income of 403280

Particulars Total Hardware Linens Sales 4140000 3130000 1010000 Variable Expenses 1245000 828000 417000 Contribution Margin 2895000 2302000 593000 Fixed Expenses 2290000 1400000 890000 Net Operating Income 605000 902000 -297000

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