Exercise 10-17 Dropping or Retaining a Segment [LO10-2] Bed & Bath, a retailing
ID: 2521874 • Letter: E
Question
Exercise 10-17 Dropping or Retaining a Segment [LO10-2]
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 $377,000 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 15% 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:
Explanation / Answer
Contribution margin for Hardware would decrease by 15% as a result of decrease in sales of Hardware Department.
Contribution margin for Hardware=2152000(1-0.15)=$1829200
Less:FC for Hardware=(1,360,000)
Net operating income for Hardware=$469200
Less:Fixed cost for Linens=(377000)
New net operating income=$92200
Hence decrease in net operating income=(711000-92200)
=$618800.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.