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 Department Hardware Linens Total Sales Variable expenses $4,380,000 $3,190,000 $ 1,190,000 1,263,000 862,000 401,000 Contribution margin Fixed expenses 3,117,000 2,328,000 789, 000 2,230,000 1,360,000 870,000 Net operating income (loss) $ 887,000 $ 968,000 $ (81,000) 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 13% decrease in the sales of the Hardware Department. Required f the Linens Department is dropped, a whole? ed, what will be the effect on the net operating income of the company as wll ecrease in net operating income

Explanation / Answer

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2,328,000/3,190,000)=0.72978

New sales for Hardware=(3,190,000*87%)=$2775300

Hence new Contribution margin=(2775300*0.72978)=$2025360

Less:FC for Hardware=($1,360,000)

Less:Fc for Linens=($375000)

New net operating income=$290360

Hence decrease in net operating income=(290360-887000)=$596640.

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