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 $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 15% 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

Hardware Linens Tota When linen is dropped Effect on Net operating income Sales 30,40,000 1030000 40,70,000 25,84,000 Variable expenses 9,30,000 4,08,000 13,38,000 7,90,500 Contribution Margin 21,10,000 6,22,000 27,32,000 17,93,500 Fixed expenses 14,80,000 8,30,000 23,10,000 18,56,000 Net operating income (loss) 6,30,000 -2,08,000 4,22,000 -62,500 Loss of 484,500

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