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: Department Total 1,382,000 3,008,000 2,216,000 Linens 408,000 792,000 Hardware $4,390,000 $3,190,000 $1,200,000 Sales Variable expenses 974,000 Contribution margirn Fixed expenses 2,330,000 1,500,000 830,000 Net operating income (loss) $ 678,000 $ 716,000 $ (38,000) A study indicates that $378,000 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 15% 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 Decrease ncrease

Explanation / Answer

Contribution margin for Hardware=Contribution margin/Sales

=(2,216,000/3,190,000)=0.69467(Approx)

New sales for Hardware=(3,190,000*0.85)=$2711500

Hence new Contribution margin=(2711500*0.69467)=$1883600

Less:Fixed costs for Hardware=($1,500,000)

Less:Fixed costs for Linens=($378000)

New net operating income=$5600

Hence decrease in net operating income=(678000-5600)=$672400

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