Bed & Bath, a retailing company, has two departments—Hardware and Linens. The co

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 $372,000 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 12% decrease in the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuing the Linens Department?

*Please show all work and how you got the answer. Thanks!

Department Total Hardware Linens Sales $ 4,160,000 $ 3,120,000 $ 1,040,000 Variable expenses 1,260,000 855,000 405,000 Contribution margin 2,900,000 2,265,000 635,000 Fixed expenses 2,260,000 1,410,000 850,000 Net operating income (loss) $ 640,000 $ 855,000 $ (215,000 )

Explanation / Answer

Financial advantage/(disadvantage) Before After Net Increase/ Dropping Dropping (Decrease) Sales revenue 4160000 2745600 -1414400 Less: Variable cost 1260000 752400 507600 Contribution margin 2900000 1993200 -906,800 Less: Fixed cost 2,260,000 1782000 478,000 Net Incremental Income/(Loss) 640,000 211200 -428,800 Financial disadvantage of discontinuing the Linen is - $428,800

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