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 Total Hardware Linens Sales $ 4,290,000 $ 3,150,000 $ 1,140,000 Variable expenses 1,288,000 884,000 404,000 Contribution margin 3,002,000 2,266,000 736,000 Fixed expenses 2,150,000 1,330,000 820,000 Net operating income (loss) $ 852,000 $ 936,000 $ (84,000 ) A study indicates that $372,000 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 12% decrease in the sales of the Hardware Department. Required: If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Explanation / Answer

If linen department is dropped, loss in profit from linen $(7,36,000-(820000-372000)) = $2,88,000

Loss in contribution of Hardware department(22,66,000/31,50,000)*(315000*12%) = $2,71,920

The net operating income fill fally by$(736000+271920) = $5,59,920

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