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: 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: If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Explanation / Answer

Net operating income will go down to $60,000

If linens drop then sales for Hardware will be 2,700,000 (which is 10% less than 3,000,000)

Fixed expenses for linen will be 340,000

now see below calculations

Total Hardware Linens Sales 2,700,000 2,700,000 Variable Expenses 900,000 900,000 Contribution margin 1,800,000 1,800,000 0 Fixed Expenses 1,740,000 1,400,000 340,000 Net operating income 60,000 400,000 (340,000)

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