5 Bed & Bath, a retailing company, has two departments-Hardware and Linens. The

Question

5 Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: 12.5 points Department Total Hardware Linens Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) 4,140,000 3,030,000 $ 1,110,000 1,399,000 2,741, 000 2,350, 000 402,000 708,000 890,000 997,000 eBook 2, 033,000 1,460,000 $ 391,000573,000 (182,000) Print References A study indicates that $380,000 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: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

contribution lost Hardware department (2,033,000*15%)= 304950 linens department 708,000 total contribution lost 1012950 Savings in fixed cost (890,000-380,000)= 510000 net loss 502950 financial disadvantage of discontinuing the Lines Department decrease net income by 502950

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