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 Total Hardware Linens Sales $ 4,290,000 $ 3,100,000 $ 1,190,000 Variable expenses 1,208,000 801,000 407,000 Contribution margin 3,082,000 2,299,000 783,000 Fixed expenses 2,280,000 1,400,000 880,000 Net operating income (loss) $ 802,000 $ 899,000 $ (97,000 ) A study indicates that $380,000 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 12% 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

hardware sales 3775200 variable expenses 1063040 contribution 2712160 fixed expenses 2660000 net income 52160 difference before -97000 now 52160 increase 149160

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