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

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 17% 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?

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

Calculation of the net operating income if Linens is droppeed Sales 2589600 3120000(100-17) Variable Expenses 810080 976000(100-17) Contribution Margin 1779520 Fixed Expenses 1380000 Fixed Expenses-Linen 372000 Net Operating Income 27520 Net Operating Income will decrease by 723000-27520 695480 Linen division should not be dropped from the company`s point of view

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