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 $377,000 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?

a) increase or b) decrease in net operating income $___?____

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

Loss of Contribution on sales of Linens

$     (609,000)

Loss of Contribution on sales of Hardware (2043000*17%)

$     (347,310)

Saving in fixed Costs of Linens (850000-377000)

$      473,000

Decrease in Net Operating income

$     (483,310)

Hence answer shall be :

b) decrease in net operating income $ 483310

Calculation of effect on the net operating income of the company as a whole, If the Linens Department is dropped:

Loss of Contribution on sales of Linens

$     (609,000)

Loss of Contribution on sales of Hardware (2043000*17%)

$     (347,310)

Saving in fixed Costs of Linens (850000-377000)

$      473,000

Decrease in Net Operating income

$     (483,310)

Hence answer shall be :

b) decrease in net operating income $ 483310

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