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 $374,000 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 19% 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?

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

Current Net Opearting Income $557,000 If Linen Division is dropped Total Hardware Linen Sales 2543400 2543400 (3140000*81%) Varaible Expenses 769500 769500 950000*81% Contribution Margin 1773900 1773900 Fixed Expenses 1784000 1410000 374000 Net Operating Income -10100 363900 -374000 The Net operating loss will be $ 10100 There will be decrease in income by $ 567100 (557000+10100) The division should not be dropped

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