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 $376,000 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 13% 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 $ 4,260,000 $ 3,070,000 $ 1,190,000 Variable expenses 1,322,000 916,000 406,000 Contribution margin 2,938,000 2,154,000 784,000 Fixed expenses 2,170,000 1,340,000 830,000 Net operating income (loss) $ 768,000 $ 814,000 $ (46,000 )

Explanation / Answer

Contribution margin lost if the Linens Department is dropped: Lost from the Linens Department $784,000 Lost from the Hardware Department (13% × $2,154,000) $280,020 Total lost contribution margin $1,064,020 Less fixed costs that can be avoided ($830,000 – $376,000) $454,000 Decrease in profits for the company as a whole $610,020

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