KQuestion 2 (of 7) value: 5.14 points Bed & Bath, a retailing company, has two d

Question

KQuestion 2 (of 7) value: 5.14 points 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 $4,240,000 $3,100,000 $ 1,140.000 1,218,000 804,000 414,000 Contribution margin Fixed expenses 3,022,000 2.296,000 726,000 2,260,000 1,440,000 820,000 Net operating income (loss) $ 762,000 856,000 (94,000) 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 Type here to search

Explanation / Answer

Contribution margin lost if the Linens Department is dropped: lost from the Linens Department 726,000 lost from the Hardware Department (2,296,000*19%) 436240 total contribution margin lost 1,162,240 less Fixed costs that can be avoided (820,000 - 374,000) 446000 Decrease in profits for the company as a whole 716,240 Decrease in net operating income 716,240

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