Question 5 (of 6) value: 3.00 points Bed & Bath, a retailing company, has two de

ID: 2591360 • Letter: Q

Question

Question 5 (of 6) value: 3.00 points Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Total Hardware Linens $4,190,000 $3,110,000 $1,080,000 1,363,000 950,000 413,000 Sales Variable expenses Contribution margin Fixed expenses 2,827,000 2,160,000 667,000 2300,000 1,430,000 870,000 Net operating income (oss) 527,000 730,000 S (203,000) A study indicates that $377,000 of the fxed expenses being charged to Linens are sunk costs or allocated costs that wll continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department wil result in a 13% 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? References eBook&Resources; Worksheet Difficulty: 1 Easy Objective: 12-02 Prepare an

Explanation / Answer

Answer:

If the Linens Department is dropped, then effect on the net operating income of thecompany as a whole

Decrease in profits for the company as a whole=$454,0000

Working notes for the answer:

Contribution margin lost if the Linens Department is dropped:

Lost from the Linens Department

667,000

Lost from the Hardware Department (13% × $2,160,000)

280800

Total lost contribution margin

947,800

Less fixed costs that can be avoided ($870,000 – $377,000)

493000

Decrease in profits for the company as a whole

454,800