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 Sales Variable expenses TotalHardware Linens $4,300,000 $3,180,000 $1,120,000 1,245,000 840,000 405,000 Contribution margin Fixed expenses 3,055,000 2,340,000 715,000 2,350,000 1,460,000 890,000 Net operating income (loss)S 705,000 S 880,000 $ (175,000) A study indicates that $372,000 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 16% 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 income

Explanation / Answer

Calculation in Net operating income of Company if Linens department is dropped:

Particulars Amount Sales ($3,180,000 - $3,180,000 x 16%) $2,671,200 Variable expenses ($840,000 - $840,000 x 16%) $7,05,600 Contribution Margin $1,965,600 Fixed Expenses ($1,460,000 + $372,000) $1,832,000 Net Operating Income (loss) $133,600

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