Bed & Bath, a retailing company. has two department Hardware and Linens The comp

ID: 2470393 • Letter: B

Question

Bed & Bath, a retailing company. has two department Hardware and Linens The company's most meant monthly contribution format Income statement follows A study indicates that $376 000 of the fixed expenses being charged to Linens are sunk costs Of allocated costs that will continue even if the Linens Department is dropped In addition the elimination of the Linens Department will result in a 20% 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?

Explanation / Answer

Ans:

Contribution margin lost if the Linens Department is dropped:

Lost from the Linens Department

670,000

Lost from the Hardware Department (20% × $2,202,000)

440,400

Total lost contribution margin

1,110,400

Less fixed costs that can be avoided ($830,000 – $376,000)

454,000

Decrease in profits for the company as a whole

656,400