Exercise 10-17 Dropping or Retaining a Segment [LO10-2] Bed & Bath, a retailing

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 $340,000 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 10% 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 lost if the Linens Department is dropped: Lost from the Linens Department $600,000 Lost from the Hardware Department (10% × $2,100,000) $210,000 Total lost contribution margin $810,000 Less fixed costs that can be avoided ($800,000 – $340,000) $460,000 Decrease in profits for the company as a whole $350,000

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