Department A study indicates that $374,000 of the fixed expenses being charged t

Question

Department

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 14% decrease in the sales of the Hardware Department.

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Department

Total Hardware Linens   Sales $ 4,240,000 $ 3,160,000 $ 1,080,000   Variable expenses 1,361,000 958,000 403,000   Contribution margin 2,879,000 2,202,000 677,000   Fixed expenses 2,170,000 1,360,000 810,000   Net operating income (loss) $ 709,000 $ 842,000 $ (133,000 )

Explanation / Answer

If linen department is dropped Department Total % Hardware   Sales $ 2844000 2844000   Variable expenses 862200 30.31646 862200   Contribution margin 1981800 69.68354 1981800   Fixed expenses 1734000 1734000   Net operating income (loss) 247800 $ 247800 There will be decrease in net operating income of the company as whole by 461200 Note : Fixed expenses =              = 1360000+374000              = 1734000

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