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 $374,000 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 20% 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 $ 4,160,000 $ 3,100,000 $ 1,060,000 Variable expenses 1,231,000 818,000 413,000 Contribution margin 2,929,000 2,282,000 647,000 Fixed expenses 2,230,000 1,390,000 840,000 Net operating income (loss) $ 699,000 $ 892,000 $ (193,000 )

Explanation / Answer

Financial Disadvantage :

If Company discontinues Linen department then Net operating income/(loss) will be

Sales

(-) variable expense

Contribution

It will result in a loss if company discontinues linen department.

so, it is advisable to run both departments therefore it will result in overall profit for the company.

Sales

2480000

(-) variable expense

818000

Contribution

1662000 (-) Fixed expense 1764000 -102000

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