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 Hardware $4,250,000 $3,080,000 $1,170,000 Linens Sales Variable expenses 1,392,000 980,000 412,000 Contribution margin Fixed expenses 2,858,000 2,100,000 758,000 2,230,000 1,380,000 850,000 Net operating income (loss) S 628,000 $ 720,000 $ (92,000) A study indicates that $373,000 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

Explanation / Answer

Contribution margin ratio for hardware=Contribution margin/Sales

=(2,100,000/3,080,000)=0.6818(Approx)

New sales for Hardware=(3,080,000*85%)=$2,618,000

Hence new Contribution margin=(2,618,000*0.6818)=$1785000

Less:Fixed costs of Hardware=($1,380,000)

Less:Fixed costs of Linens=($373000)

New net operating income=$32000

Hence decrease in net operating income=(628000-32000)=$596000

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