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 Sales Variable expenses TotalHardware Linens $4,210,000 $3,030,000 $1,180,000 1,320,000 901,000 419,000 Contribution margin Fixed expenses 2,890,000 2,129,000761,000 2,210,000 1,330,000880,000 Net operating income (loss) $680,000 $ 799,000 $ (119,000) A study indicates that $374,000 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 19% decrease in the sales of the Hardware Department Required 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

Contribution margin for Hardware=Current contribution margin(1-decrease rate)[Since sales would decrease;variable costs would also decrease and as a result total contribution margin would also decrease].

=2,129,000(1-0.19)

=$1,724,490

Less:Fixed cost for Hardware=$1,330,000

Net operating income for Hardware=$394490

Less:Fixed cost for Linens=(374000)

New Net operating income for the company=$20490

Hence decrease in Net operating income=(680000-20490)=$659,510.

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