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 1,400,000 800,000 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?

Question

Willie Mcclure

Business

12 August, 13:51

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 1,400,000 800,000 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?

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Jaxson Bright · Answer 1

Total financial disadvantage from closing of Linens Depart. $ (350,000)

Explanation:

Computations for financial impact of discontinuing Linens Department

Positive impact of loss of discontinued Linens Department $ 200,000

Negative impact of sunk costs Linens Department $ (340,000)

Impact of 10 % reduction in sales and contribution margin of

Hardware Department ($ 2,100,000 * 10 %) $ (210,000

Total financial disadvantage from closing of Linens Depart. $ (350,000)