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:

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 12% decrease in the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Department Total Hardware Linens Sales $ 4,200,000 $ 3,080,000 $ 1,120,000 Variable expenses 1,215,000 803,000 412,000 Contribution margin 2,985,000 2,277,000 708,000 Fixed expenses 2,280,000 1,470,000 810,000 Net operating income (loss) $ 705,000 $ 807,000 $ (102,000 )

Explanation / Answer

Loss in Contribution margin of Linens dept. -708000 Avoidable Fixed expenses 437000 =810000-373000 Loss in Contribution margin of Hardware dept. -273240 =2277000*12% Financial disadvantage -544240 or $544240

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