EXERCISE 12-17 Dropping or Retaining a Segment LO12-2 Bed & Bath, a retailing co

Question

EXERCISE 12-17 Dropping or Retaining a Segment LO12-2 Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Total Hardware Linens $4,000,000 $3,000,000 $1,000,000 900,000 400.000 600,000 Sales 1.300,000 2,700,000 2,100,000 Contribution margin .. . . Fixed expenses .. 2200,000 1400.000 800,000 Net operating income (loss)500.000 700,000 (200.000) 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: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Contribution margin lost if the Linen Department is dropped: Lost from the Linen Department 600000 Lost from the Hardware Department (10% × $2,100,000) 210000 Total lost contribution margin 810000 Less fixed costs that can be avoided ($800,000 – $340,000) 460,000 Decrease in profits for the company as a whole 350,000 Shoul not discontinue the production of lenin as there is a decrease in profit to the company by 350000

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