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 Lin Total Hardware $4,290,000 $3,200,000 $1,090,000 1,224,000 823,000 401,000 ens Sales Variable expenses Contribution margin Fixed expenses 3,066,000 2,377,000 689,000 2,210,000 1,370,000 840,000 Net operating income (loss) 856,000 $1,007,000 (151,000) A study indicates that $378,000 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 15% 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? in net operating income583,000 ecrease

Explanation / Answer

Decrease in Income = 856000 - 272450

= $583550

Note:

Sale of Hardware = 3200000 x 85% = 2720000

Variable Cost of New Sales = 823000 / 3200000 x 2720000

= 699550

Particulars Total Hardware Linens Sales 2720000 2720000 0 Less: Variable Expenses 699550 699550 0 Contribution 2020450 2020450 0 Less: Fixed Expenses 1748000 1370000 378000 Net Income 272450 650450 -378000

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