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 $ 4,190,000 $ 3,070,000 $ 1,120,000

Variable expenses 1,385,000 977,000 408,000

Contribution margin 2,805,000 2,093,000 712,000

Fixed expenses 2,200,000 1,380,000 820,000

Net operating income (loss) $ 605,000 $ 713,000 $ (108,000 )

A study indicates that $376,000 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 18% 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?

Explanation / Answer

Answer - Net operating income of the company will stand at a loss of - $39740 if linen department dropped

Here is the working-

Operating statement as per previous condition Particulars Hardware Linen Total Sales 3070000 1120000 4190000 Variable expenses 977000 408000 1385000 variable expenses % 31.82% 36.43% 33.05% Contribution margin 2093000 712000 2805000 Contribution margin % 68.18% 63.57% 66.95% Fixed Expenses 1380000 820000 2200000 Net operating Income 713000 -108000 605000 Net Operating Income of the the company as a whole if linen department dropped Particulars Hardware Linen Total Sales 2517400 2517400 Variable expenses 801140 801140 Contribution margin 1716260 0 1716260 Fixed Expenses 1380000 376000 1756000 Net operating Income 336260 -376000 -39740

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