PLEASE FIND THE ANSWER TO THIS. THANKS! Dropping or Retaining a Segment [L012-2]

Question

PLEASE FIND THE ANSWER TO THIS. THANKS!

Dropping or Retaining a Segment [L012-2] Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: 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 14% 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

Contribution margin lost if the Linen Department is dropped:

Lost from the Linen Department ............................................        $614,000

Lost from the Hardware Department (14% × $2,215,000) .......    310,100

Total lost contribution margin ...................................................       924100

Less fixed costs that can be avoided ($890,000 – $377,000).......    513,000

Decrease in profits for the company as a whole ......................... $411100

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