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 ardware Linens Sales Variable expenses $4,320,000 $3,130,000 $1,190,000 1,273,000 861,000 412,000 Contribution margin Fixed expenses 3,047,000 2,269.000 778,000 2,180,000 350,000 830,000 Net operating income (loss) S 867,000 S 919,000 $ (52,000) 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? n net operating i

Explanation / Answer

Since Fixed Costs of $377,000 are unavoidable costs that means even if the company drop the Linens department, it have to incure that much fixed cost associated with Linens department.

Therefore Saving in Fixed cost ( avoidable costs) if Linens department is dropped

= $830,000 - $377,000 = $453,000

Contribution loss to the company if Linens department is dropped =

Contibution of Linens department - 19% Contibution of Hardware department = $778,000 + (19 % *$2,269,000)

= $1,209,110

Impact in net operating income of the compny if Linens department is dropped = Contribution Loss - Saving

= $1,209,110 - $453,000 = $756,110 loss

Final answer

Decrease in net operating income $756,110

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