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 16% 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:

Department

Total Hardware Linens   Sales $ 4,260,000 $ 3,130,000 $ 1,130,000   Variable expenses 1,356,000 946,000 410,000   Contribution margin 2,904,000 2,184,000 720,000   Fixed expenses 2,290,000 1,450,000 840,000   Net operating income (loss) $ 614,000 $ 734,000 $ (120,000 )

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer    Statementshowing Computations Paticulars Hardware Sales = 3130,000*.84        2,629,200.00 Less Variable Expenses = 946000*.84            794,640.00 Contribution Margin =Sales - VC        1,834,560.00 Fixed cost = 1450,000+375,000        1,825,000.00 Net operating income if Linen is dropped                9,560.00 Net operating income if Linen is not dropped            614,000.00 Decrease in in net operating income            604,440.00

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