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
Total Hardware Linens
Sales $4,280,000 $3,130,000 $1,150,000
Variable expenses
1,205,000
801,000
404,000
Contribution margin 3,075,000 2,329,000 746,000
Fixed expenses 2,070,000 1,310,000 760,000
Net operating income (loss)
$1,005,000
$1,019,000
$(14,000)

A study indicates that $379,000 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 16% 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.)

(increase/decrease) in profits for the company as a whole $

Explanation / Answer

Total Hardware Linens Department Sales 3130000 1150000 4280000 Variable Expenses 801000 404000 1205000 Contribution 2329000 746000 3075000 Fixed Expenses 1310000 760000 2070000 Net Operating Income 1019000 -14000 1005000 Hardware % of changes Changed Amount Net Changes Sales 3130000 =3130000*16% 500800 2629200 Variable Expenses 801000 =801000*16% 128160 672840 Contribution 2329000 1956360 Fixed Expenses 1310000 =1310000+379000 1689000 1689000 Net Operating Income 1019000 $267,360 Decrease in Net Income Department = 1005000 - 267360 $737,640 Decrease in Net Income for Hardware = 1019000 - 267360 $751,640
Note: If sales decrease automatically variable cost will decrease with same proportion, but there is no changes in fixed cost. Thank you.... Total Hardware Linens Department Sales 3130000 1150000 4280000 Variable Expenses 801000 404000 1205000 Contribution 2329000 746000 3075000 Fixed Expenses 1310000 760000 2070000 Net Operating Income 1019000 -14000 1005000

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