Bed & Bath, a retailing company, has two departments Hardware and Linens. The co

Question

Bed & Bath, a retailing company, has two departments Hardware and Linens. The company's most recent monthly contribution format income statement follows: Sales Variable expenses TotalHardware Linens 4,220,000 $3,100,000 $1,120,000 1,362,000 950,000 412,000 Contribution margin Fixed expenses 2,858,000 2,150,000 708,000 ,290,000 1,440,000 850,000 Net operating income (loss) $ 568,000$710,000 $(142,000) A study indicates that $380,000 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 12% 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?

Explanation / Answer

Particulars Hardware Sales (3100000-(3100000*12%) $2,728,000 Less:Variable expenses (950000-(950000*12%) $836,000 Contribution Margin $1,892,000 Less: Fixed Cost (1440000+380000) $1,820,000 Net Operating Profit $72,000 The decrease in the net profit will be $568,000 - $72,000 = $       496,000

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