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: Total Linens Sales Variable expenses Hardware $4,290,000 $3,130,000 $1,160,000 1,351,000 949,000 402,000 Contribution margin Fixed expenses 2,939,000 2,181,000 758,000 2,150,000 1,330,000 820,000 Net operating income (loss) S 789,000 S 851,000 S (62,000) 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 19% 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

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2,181,000/3,130,000)=0.6968

New sales for Hardware=3,130,000(1-0.19)=$2,535,300

Hence new Contribution margin=2,535,300*0.6968=$1,766,610

LEss:Fixed costs for Hardware=(1,330,000)

Less:Fixed costs for Linens=($377000)

New net operating income=$59610

Hence decrease=(789000-59610)=$729390

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