Exercise 10-17 Dropping or Retaining a Segment [LO10-2] Bed & Bath, a retailing
ID: 2583615 • Letter: E
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 $ 4,000,000 $ 3,000,000 $ 1,000,000
Variable expenses 1,300,000 900,000 400,000
Contribution margin 2,700,000 2,100,000 600,000
Fixed expenses 2,200,000 1,400,000 800,000
Net operating income (loss) $ 500,000 $ 700,000 $ (200,000)
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.
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
The following table shows the effect of dropping the Linens department
Discontinuing Linens department as a whole will result in decrease of profits of the company as a whole from $500,000 to ($500,000 - $350,000) =>$150,000 .
Therfore, Linens department should be continued.
Contribution of linen department lost $600,000 Contribution of hardware department lost (10%*21,00,000) $210,000 Total loss of contribution margin $810,000 Less: avoidable fixed costs ($800,000 - 340,000) ($460,000) Decrease in net operting income of the company as a whole $350,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.