Ohio Home Company, a retail company, has two departments, indoor and outdoor. Th

Question

Ohio Home Company, a retail company, has two departments, indoor and outdoor. The company’s most recent monthly contribution format income statement is presented below.
Department
Total Outdoor Indoor

Sales $ 4,800,000 $ 1,200,000 $ 3,600,000
Variable Expenses 1,800,000 400,000 1,400,000
Contribution Margin 3,000,000 800,000 2,200,000
Fixed expenses 2,800,000 1,000,000 1,800,000

Net operating income (loss) $ 200,000 $ (200,000) $ 400,000

A study indicates that $400,000 of the fixed expenses being charged to the Outdoor department are sunk costs, or allocated costs that will continue even if the Outdoor department is dropped. In addition, the elimination of the Outdoor department would result in a 10% decrease in the sales of the Indoor department.

Ignore the impact of income taxes in your calculation.

Effect on net operating income = $

Explanation / Answer

The effect on net income is a decrease of 420,000 for a net loss of 220,000. without the outdoor department: sales 3,240,000 (90% of indoor) variable expenses1,260,000 (90%) contribution margin 1,980,000 (3,240,000-1,260,000) fixed expense 2,200,000 (1,800,000 + 400,000 sunk cost) net loss of 220,000. (1,980,000-2,200,000)

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