Bed & Bath, a retailing company, has two departments—Hardware and Linens. The co

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 $ 4,280,000 $ 3,100,000 $ 1,180,000 Variable expenses 1,335,000 931,000 404,000 Contribution margin 2,945,000 2,169,000 776,000 Fixed expenses 2,260,000 1,420,000 840,000 Net operating income (loss) $ 685,000 $ 749,000 $ (64,000 ) 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 19% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Explanation / Answer

Contribution margin lost of Linen -776000 Avoidable fixed costs 467000 =840000-373000 Contribution margin lost of Hardware -412110 =2169000*19% Financial disadvantage -721110 Financial disadvantage of discontinuing the Linens Department $721110

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