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 Total Hardware Linens $4,170,000 $3,160,000 $1,010,000 Sales Variable expenses 1,388,000 975,000 413,000 Contribution margin Fixed expenses 2,782,000 2,185,000 597,000 2,180,000 1,350,000 830,000 Net operating income (loss) 602,000 835,000 $ (233,000) A study indicates that $375,000 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 12% decrease in the sales of the Hardware Department. If the Linens Department is dropped, what will be the effect on the net operating income of the company as in net operating income

Explanation / Answer

Solution:-

Effect on Net Operating Income if Linnen Department Dropped:-

Hardware Total Sales 2780800 << Decrease by 12% in Hardware Sales Varibale Expenses 858000 << Due to Decrease in Sales, Varibale Cost will also be decreased by same proportion Contribution Margin 1922800 Fixed Expenses 1725000 <<375000 fixed expenses will still be incurred even after dropping of Linned Department Net Operating Income 197800 Earlier Net Opearting Income 602000 Decrease in Operating Income 404200

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