value: 10.00 points Bed & Bath, a retailing company, has two departments, Hardwa
ID: 2583249 • Letter: V
Question
value: 10.00 points Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: - 7-t-i-. Departmen TotalHardwareLinens $4,370,000 $3,190,000 $1,180,000 1,214,000811,000 403,000 Sales Variable expenses Contribution margin Fixed expenses 3,156,000 2,379,000777,000 2,170,000 1,300,000 870,000 Net operating income (loss)S 986,000 $1,079,000 s (93,000) A study indicates that $376,000 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 wholet ease n net operating incomeExplanation / Answer
Since Fixed Costs of $376,000 are unavoidable costs that means even if the company drop the Linens demartment, it have to incure that much fixed cost associated Linens demartment.
Therefore Saving in Fixed cost ( avoidable costs) if Linens demartment is dropped
= $870,000 - $376,000 = $494,000
Contribution loss to the company if Linens demartment is dropped =
Contibution of Linens demartment - 15 % Contibution of Hardware demartment = $777,000 + (15 % *$2,379,000)
= $1,133,850
Impact in net operating income of the compny if Linens demartment is dropped = Contribution Loss - Saving
= $1,133,850 - $494,000 = $639,850 loss
Final answer
Decrease in net operating income $639,850
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