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 $375,000 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 11% 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

Loss of contribution

= loss of contribution due to reduced sale of hardware division by 11% + loss of contribution because of discontinuing the Linen department.

= 11% of $2274000 + $734000

= $ 250140 + $ 734000

= $ 984140

Saving in fixed cost

= total fixed cost of the Linen department - Unavoidable cost

= $880000 - $375000

= $505000

net loss from discontinuing the Linen department

= loss of contribution - savings in fixed expenses

= $ 984140 - $505000

= $479140

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