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 Sales $ 4,330,000 $ 3,190,000 $1,140,000 Variable expenses Contribution margin 1,385,000 967,000 418,000 2,945,000 2,223,000 722,000 Fixed expenses 2,320,000 1,450,000 870,000 Net operating income (1oss) 625,000 77३,०00 । (148,000) 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 11% decrease in the sales of the Hardware Department Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

	Financial Disadvantage		=	$     4,74,530
	Workings:
		Total	If Linen Department discontinued	Differential amount
	Sales	$       43,30,000	$           28,39,100	$ -14,90,900
Less:	Variable expense	$       13,85,000	$              8,60,630	$     5,24,370
	Contribution margin	$       29,45,000	$           19,78,470	$   -9,66,530
Less:	Fixed expenses	$       23,20,000	$           18,28,000	$     4,92,000
	Net operating Income	$          6,25,000	$              1,50,470	$   -4,74,530
		If Linen Department discontinued
	Sales	3190000*(1-0.11)
	Variable expense	967000*(1-0.11)
	Fixed expenses	1450000+378000