Question

Document1 - Word ilings Review View Add-ins Help Tell me what you want to do AEE E B 2 21 AaBbcedd AoBbceDd AaBbc Aabbcct AaB 1 Normal 1 No Spac... Heading 1 Heading 2 Title - A Paragraph Styles 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 $4,000,000 $3,000,000 $1,000,000 Variable expenses 1,300,000 900,000 400,000 Contribution margin 2,700,000 2,100,000 600,000 Fixed expenses 2,200,000 1,400,000 8 00,000 Net operating income (loss) $ 500,000 $ 700,000 $ (200,000) A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department? (Ctrl) -

Answer 1

income statement if Linens department is discontinued:

	Hardware
contribution margin (2,100,000-10%) (since there will be a 10% drop)	1,890,000
less:fixed expenses (1,400,000+340,000)	(1,740,000)
net operating income	150,000

since the net operating income dropped to 150,000 from 500,000 by discontinuing Linens, there is a financial (disadavantage) of (150,000 -500,000) =>(350,000).

financial advantage (disadvantage) of discontinuing Linens department

(350,000)