4. value: 10.00 points Bed & Bath, a retailing company, has two departments, Har

ID: 2561015 • Letter: 4

Question

4. value: 10.00 points Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Total Harare Linens Linens Sales Variable expenses Hardware $4,290,000 $3,150,000 $1,140,000 1,294,000 886,000 408,000 Contribution margin Fixed expenses 2,996,000 2,264,000 732,000 2,190,000 1,360,000 830,000 Net operating income (loss) $ 806,000 $ 904,000 $ (98,000) A study indicates that $378,000 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 18% 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? in net operating income

Explanation / Answer

solution:

Contribution margin lost if the Linens Department is dropped:

Lost from the Linens Department

732000

Lost from the Hardware Department(18% x 2264000)

407520

Total lost contribution margin

1139520

Less fixed costs that can be avoided(830000 - 378000)

452000

Decrease in profits for the company as a whole:

687520