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 $ 4,330,000 3,180,000 $ 1,150,000 Sales Variable expenses 987,000 1,396,000 409,000 Contribution margin 2,934,000 2,193,000 741,000 Fixed expenses 2,340,000 1,490,000 850,000 $ 703,000 $ (109,000) 594,000 $ Net operating income (loss) 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 17% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

If the Linens department is dropped, then there will be only Hardware department in the company.
Let us calculate the total net operating income (loss) if the linens department is dropped.
	Total
Sales [ 3180000 * ( 1 - 17% ) ]	2639400
Variable expenses [ 987000 * 2639400 / 3180000 ]	819210
Contribution margin	1820190
Fixed expenses [ 1490000 + 377000 ]	1867000
Net operating income (loss)	(46810)

Net operating income (loss) after dropping Linens department	(46810)
(-) Net operating income (loss) before dropping Linens department	594000
Financial advantage (disadvantage) of discontinuing the Linens department	(640810)