Question

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 $4,260,000 $3,160,000 $1,100,000 1,229,000 825,000 404,000 Sales Variable expenses Contribution margin Fixed expenses 3,031,000 2,210,000 2,335,000 1,320,000 696,000 890,000 Net operating income (loss) $ 821,000 $1,015,000 $ (194,000) 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 16% decrease in the sales of the Hardware Department Required: If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole? in net operating income

Answer 1

Contribution margin for Hardware would be=2,335,000*(1-decrease in growth rate)

=2,335,000*(1-0.16)=1961400

Less:Fixed cost for Hardware=(1,320,000)

Net operating income for Hardware=641400

Less:Unavoidable fixed cost for Linens=(378,000)

Total net operating income would be=$263400

Hence decrease in net operating income=(821,000-263400)=$557600