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: Sales Variable expenses TotalHardware Linens $4,360,000 $3,170,000 S1,190,000 1,231,000 826,000 405,000 Contribution margin Fixed expenses 3,129,000 2,344,000 785,000 Net operating income (loss S 879,000 S 994,000 S (115,000) A study indicates that S377,000 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 14% decrease in the sales of the Hardware Department. Required s 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

Department Hardware Linens Total Sales 3170000 1190000 4360000 Less: Variable Cost 826000 405000 1231000 Contribution Margin 2344000 785000 3129000 Less: Fixed Cost 1350000 900000 2250000 Net Operating Income 994000 -115000 879000 Total Fixed OH charged to Linens 900000 Less: Sunk or Allocable OH 377000 Linen's Fixed OH 523000 Sales Decline in Hardware due to Closure of Linens 443800 Income Statement post closure of Linens Departement: Hardware Sales 2726200 (86% of 3170000) Less: Variable Cost 710360 (86% of 826000) Contribution Margin 2015840 Less: Fixed Cost** 1727000 Net Operating Income 288840 Net Operating Income will decrease by 590160/- ** Fixed OH of Hardware Department 1350000 Sunk or Allocable Fixed OH Assigned to Linen now charged to Hardware 377000 Total Fixed OH 1727000

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