Bed & Bath, a retailing company, has two departments, Hardware and Linens. The c
ID: 2471904 • Letter: B
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 $ 4,000,000 $ 3,000,000 $ 1,000,000 Variable expenses 1,300,000 900,000 400,000 Contribution margin 2,700,000 2,100,000 600,000 Fixed expenses 2,200,000 1,400,000 800,000 Net operating income (loss) $ 500,000 $ 700,000 $ (200,000) 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
Answer:
Income Statement if Linens Department is dropped
Hardware
Linens
Total
New Sales
$3,300,000
$3,300,000
Variable Expenses
$990,000
$990,000
Contribution Margin
$2,310,000
$0
$2,310,000
Fixed expenses
$1,400,000
$340,000
$1,740,000
Net operating income (loss)
$910,000
($340,000)
$570,000
Net Income of company will be increased by $70,000 if Linens Department is dropped.
New Sales Value of Hardware = $3000,000 x 110% = $3,300,000
Since Variable Cost vary with the output, hence variable cost will also increase by 10%.
Income Statement if Linens Department is dropped
Hardware
Linens
Total
New Sales
$3,300,000
$3,300,000
Variable Expenses
$990,000
$990,000
Contribution Margin
$2,310,000
$0
$2,310,000
Fixed expenses
$1,400,000
$340,000
$1,740,000
Net operating income (loss)
$910,000
($340,000)
$570,000
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