Question

Exercise 11-17 Dropping or Retaining 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: Department Total Hardware Linens $4,250,000 $), DED, ODDS1,190,000 Variable expenses Contribution margin 772.000 2,339,000 2.350.000 2.067.000 1.000.000 A study indicates that $374,000 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

Solution

Net financial Disadvantage of Discontinuing linens department

$ 544,710

Working

Net operating income before discontinuing linens	$ 489,000
Net operating income after discontinuing linens	-$ 55,710
Net financial Disadvantage of Discontinuing linens department	$ 544,710

.

	Total	Hardware	Linens
Sales	$ 2,662,200	$ 2,662,200
Variable expenses	$ 863,910	$ 863,910
Contribution margin	$ 1,798,290	$ 1,798,290	$ 0
Fixed expenses	$ 1,854,000	$ 1,480,000	$ 374,000
Net Operating Income (Loss)	-$ 55,710	$ 318,290	-$ 374,000