Question

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Total $ 4,230,000 1,227.000 3,003.000 2,270,000 $ 733,000 Department Hardware Linens $3,170,000 $ 1,060,000 811,000 416,000 2,359,000 644.000 1,430,000 840,000 $929.000 $ (196,000) 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

Schedule showing new opereting income of the company if linens is dropped Linens Less Sales Revenue Variable Expense Contribution Margin Fixed Expense Segment Margin Total 2,662,800 681,240 1,981,560 1,808,000 173,560 $ $ $ $ $ Hardware 2,662,800 $ 681,240 $ 1,981,560 $ 1,430,000 $ 551,560$ Less 378,000 (378,000) Working Sales Revenue Variable cost Hardware 3170000 - (16% of 3170000) 811000 - (16% of 811000) Profit with linens Profit without linens Decrease in net operating income by $ $ 733,000 173,560 559,440 All income and expenses except sunk cost of $378000 will become O for linen if linen is dropped. It will also impact sale of hardware so sales and variable cost will reduce by 16%.