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 $374,000 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 13% 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

Answers

Department

Total

Hardware

Linens

   Sales

$                       2,644,800.00

$         2,644,800.00

$                                    -  

   Variable expenses

$                           828,240.00

$             828,240.00

$                                    -  

   Contribution margin

$                       1,816,560.00

$         1,816,560.00

$                                    -  

   Fixed expenses

$                       1,844,000.00

$         1,470,000.00

$                   374,000.00

   Net operating income (loss)

$                           (27,440.00)

$             346,560.00

$                (374,000.00)

---Working for above:

Department

Hardware

Linens

  Sales

=3040000-(3040000*13%)

0

  Variable expenses

=952000*2644800/3040000

0

  Contribution margin

Sales – Variable expenses

Sales – Variable expenses

  Fixed expenses

1470000

374000

  Net operating income (loss)

Contribution – Fixed expenses

Contribution – Fixed expenses

Net Income when Linen was not dropped = $ 493,000 (total)

Net Income (Loss) when Linen is dropped = $ (27,440)

Hence, If Linen is dropped, The Net Income of the company will DECREASE by $ 520,440 [$ 493,000 – $ (27440)] as a whole.

Department

Total

Hardware

Linens

   Sales

$                       2,644,800.00

$         2,644,800.00

$                                    -  

   Variable expenses

$                           828,240.00

$             828,240.00

$                                    -  

   Contribution margin

$                       1,816,560.00

$         1,816,560.00

$                                    -  

   Fixed expenses

$                       1,844,000.00

$         1,470,000.00

$                   374,000.00

   Net operating income (loss)

$                           (27,440.00)

$             346,560.00

$                (374,000.00)

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