Bed & Bath, a retailing company, has two departments, Hardware and Linens. The c

Question

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Departmen Sales Variable expenses Total Hardware Linens $4,080,000 $3,080,000 $1,000,000 1,330,000 926,000 404,000 Contribution margin Fixed expenses 2,750,000 2,154,000 596,000 2.260,000 1380.000 880,000 Net operating income (loss) S 490,000 S 774,000 S (284,000) A study indicates that $379,000 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 11% 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

Answer: if Linens department is dropped the change in net profit would Particulars Amount Sales $        2,741,200.00 $3080000*89% Less: Variable cost $            824,140.00 $926000*89% Contribution margin $        1,917,060.00 Less: Fixed cost $        1,380,000.00 Sunk cost of Linens department $            379,000.00 Net profit $            158,060.00 Therefore, the net profit would decrease by $331,940 Decrease in net profit would be $331,940.

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