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

A study indicates that $372,000 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 17% decrease in the sales of the Hardware Department.

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

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

Calculation if linen Department is dropped:

Sale.........3,180,000 * 83% (reflecting 17% decline)................2639400

Variable exp......(862/3180) * 2639400......................................715460

Contribution margin................................................................1923940

Fixed cost of hardware unit 1,430,000

sunk cost of Linen unit 372,000

Net operating income ................................ 121940. Decrease .

Hence Linen department should not be discontinued.

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