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 $373,000 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 18% 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?

Department

Total Hardware Linens   Sales $ 4,150,000 $ 3,050,000 $ 1,100,000   Variable expenses 1,401,000 992,000 409,000   Contribution margin 2,749,000 2,058,000 691,000   Fixed expenses 2,390,000 1,500,000 890,000   Net operating income (loss) $ 359,000 $ 558,000 $ (199,000 )

A study indicates that $373,000 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 18% 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

CM ratio for Harware = 2058000/3050000=.6748 or 67.48%

Loss of contribution if Linen department is closed = 3050000*.18 *.6748 = 370465.2

When Linen is eliminated ,the overall decrease in operating income of a compnay as a whole will be = 370465.2 + 691000 = 1,061,465.2

**Increase in loss of linen department = 890000-199000=691000

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