Help Exercise 12-17 Dropping or Retaining a Segment [L012-2] Bed & Bath, a retai

Question

Help Exercise 12-17 Dropping or Retaining a Segment [L012-2] 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 $ 1,000,000 400,000 2,700,000 2,100,000 600,000 800,000 $ 500,000$ 700,000 (200,000) 1,300,00o 900,000 Contribution margin Fixed expenses 2,200,000 1,400,000 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: What is the financial advantage (disadvantage) of discontinuing the Linens Department? ?Prev 6016m Next

Explanation / Answer

Solution:

Therefore there is net financial disadvantage of $350,000 on discontinue of Linens line.

Incremental Analysis - Bed and bath Particulars Current total Total if Linens line is dropped Financial advantage (disadvantage) on dropping Linens Sales $4,000,000.00 $2,700,000.00 -$1,300,000.00 Variable manufacturing and selling expenses $1,300,000.00 $810,000.00 -$490,000.00 Contribution Margin $2,700,000.00 $1,890,000.00 -$810,000.00 Fixed Expenses $2,200,000.00 $1,740,000.00 -$460,000.00 Net Income $500,000.00 $150,000.00 -$350,000.00

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