4. 10.00 points value: Bed & Bath, a retailing company, has two departments, Har

Question

4. 10.00 points value: Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: artment Sales Variable expenses Total Hardware Linens $4,300,000 $3,130,000 $1,170,000 1,373,000 963,000 410,000 Contribution margin Fixed expenses 2,927,000 2,167,000 760,000 2,250,000 1,430,000 820,000 Net operating income (loss)677,000 S 737,000 (60,000) 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? in net operating income

Explanation / Answer

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2167000/3130000)=0.6923

New sales for Hardware=(3130000*84%)=$2629200

Hence new Contribution margin for Hardware=(2629200*0.6923)=$1820280

Less:Fixed costs for Hardware=(1,430,000)

Less:Fixed costs for Linens=(372000)

Net operating income=$18280

Hence decrease in net operating income=(677000-18280)=$658720.

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