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:
Sales $4,000,000 $3,000,000 $1,000,000
Variable expenses 1,300,000
900,000
400,000
A study indicates that $340,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 10% decrease in the sales of the Hardware Department.
Required:
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole? (Input the amount as positive value. Omit the "$" sign in your response.)
Contribution margin 2,700,000 2,100,000 600,000
Fixed expenses 2,200,000 1,400,000 800,000
Net operating income (loss) $500,000
$700,000
$(200,000)

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole? (Input the amount as positive value. Omit the "$" sign in your response.)

Explanation / Answer

Current net operating income = $4,000,000 - 1,300,000 -2,200,000 = $500,000 Net operating income after linen department is dropped = $3,000,000*90% -900,000*90% - 1,400,000 -$340,000 = $150,000 change in net operating income = $150,000 - $500,000 = -$350,000 net operating income will decrease by $350,000

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