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: Department Total Hardware Linens Sales $ 4,000,000 $ 3,000,000 $ 1,000,000 Variable expenses 1,300,000 900,000 400,000 Contribution margin 2,700,000 2,100,000 600,000 Fixed expenses 2,200,000 1,400,000 800,000 Net operating income (loss) $ 500,000 $ 700,000 $ (200,000 ) A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Loss in Contribution margin of Linen -600000 Avoidable fixed costs 460000 =800000-340000 Increase in Contribution margin of Hardware 210000 =2100000*10% Financial advantage 70000

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