Question

Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Hardware Linens Total $ 4,240,000 $ 3,120,000 ş1,120,000 Sales Variable expenses 1,335,000 934,000 401,000 Contribution margin 2,186,000 719,000 2,905,000 Fixed expenses 2,130,000 1,330,000 800,000 775,000 $ 856,000 $ Net operating income (loss) (81,000) A study indicates that $377,000 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 13% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

Lost from the Linen Department						719,000
lost from the Hardware department				(2,186,000*13%)		284180
total contribution margin lost						1,003,180
Savings in fixed cost			(800,000-377000)			423000
Decrease in profits for the company as whole						580,180
financial disadvantage				580,180
(input the answer figure as negative if required)