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 Variable expenses Contribution margin Fixed expenses Net operating income (loss) $ 4,120,000 $ 3,070,000 ? 1,050,000 410,000 640,000 820,000 1,211,000 2,909,000 2,269,000 2,170,000 1,350,000 801,000 $ 739,000$919,000 $ (180,000) A study indicates that $379,000 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 13% 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 Linens -640000 Loss in contribution margin of Hardware -294970 =2269000*13% Avoidable fixed costs 441000 =820000-379000 Financial(disadvantage) -493970

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