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

Answer:

Calculation of Net Operating Income of the company as a whole, if Linens Department is dropped

Sales (after 16% decrease) = $ 2,671,200

Variable Expense (after 16% decrease) = $ 705,600

Contribution = $ 1,965,600

Less Fixed Cost ($1460,000 + $372,000) = $ 1,832,000

Net operating Income (loss) = $ 133,600

Conclusion : WIth the drop of Linens Department, the net operating income will decrease to $ 133,600 . Hence, the Linens department should not be dropped out

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.