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 Total Linens Sales Variable expenses Hardware $4,110,000 $3,070,000 S1,040,000 1,226,000 810,000 416,000 Contribution margin Fixed expenses 2,884,000 2,260,000 624,000 2,240,000 1,360,000 880,000 Net operating income (loss) S 644,000 S 900,000 S (256,000) A study indicates that S376,000 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 18% 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 lost if the Lines Department is dropped: lost from the Linens Department -624,000 lost from the Hardware Department (2260000*18%) -406800 total lost contribution margin -1,030,800.0 less fixed costs that can be avoided (880,000-376,000) 504000 Decrease in profits for the company as a whole -526,800.0 Decrease in net operating income 526,800

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