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 $373,000 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 20% 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? in net operating income

Explanation / Answer

Calculation of the net operating income if Linens is droppeed Sales 2528000 3160000*80% Variable Expenses 666400 833000*80% Contribution Margin 1861600 Fixed Expenses 1310000 Fixed Expenses-Linen 373000 Net Operating Income 176720 Decrease in net operating Income 609280 786000-609280 Linen Division should not be dropped

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