** the answer is not 133,600 Bed & Bath, a retailing company, has two department

Question

** the answer is not 133,600

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Sales Variable expenses TotalHardware Linens $4,300,000 $3,180,000 $1,120,000 1,245,000 840,000 405,000 Contribution margin Fixed expenses 3,055,000 2,340,000 715,000 2,350,000 1,460,000 890,000 Net operating income (loss)S 705,000 S 880,000 $ (175,000) A study indicates that $372,000 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 16% 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? n net operating income

Explanation / Answer

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2,340,000/3,180,000)=0.7358

New sales for Hardware=(3,180,000*84%)=$2671200

Hence new Contribution margin=(2671200*0.7358)=$196500

Less:Fixed costs for Hardware=(1,460,000)

Less:Fixed cost for Linens=(372000)

New net operating income=$133600

Hence decrease=(705000-133600)

which is equal to=$571400.

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