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 Hardware Linens Total Sales Variable expenses $4,180,000 $3,040,000 $1,140,000 1,349,000 934,000 415,000 Contribution margin Fixed expenses 2,831,000 2,106,000 725,000 2,320,000 1450,000 870,000 Net operating income (loss) 511,000 S 656,000 (145,000) A study indicates that S378,000 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

Explanation / Answer

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2,106,000/3,040,000)=0.69276

New sales for Hardware=(3,040,000*81%)=$2462400

Hence new Contribution margin=(2462400*0.69276)=$1705860

Less:Fixed costs for Hardware=(1,450,000)

Less:Fixed cost for Linens=(378000)

New net operating income=$(122140)

Hence decrease=(511000+122140)=$633140.

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