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

A study indicates that $375,000 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.

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

Explanation / Answer

Answer:

Contribution margin lost if the Linens Department is dropped: Lost from the Linens Department 624000 Lost from the Hardware Department (16% × $2,248,000) 359680 Total lost contribution margin 983680 Less: fixed costs that can be avoided ($810,000 – $375,000) 435000 Decrease in profits for the company as a whole 548680

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