Question

Exercise 11-17 Dropping or Retalning a Segment [LO11-2] 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 Contribution margin Fixed expenses Net operating income (loss) Department Total Hardware Linens $4,130,000 $3,010,000 $1,120,000 1,308,000 904,000 404,800 2,822,000 2,106,000 716,890 2,140,000 1,320,000 820,000 $ 682,000 $ 786,800 $ (104,000) 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: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

Contribution margin lost if the Linens Department is dropped:
Lost from the Linens Department	$716,000
Lost from the Hardware Department (15% × $2,106,000)	$315,900
Total lost contribution margin	$1,031,900
Less fixed costs that can be avoided ($820,000 – $378,000)	$442,000
Decrease in profits for the company as a whole	$589,900