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 $4,180,000 $3,100,000 $1,080,000

Variable expenses 1,308,000 891,000 417,000

Contribution margin 2,872,000 2,209,000 663,000

Fixed expenses 2,120,000 1,320,000 800,000

Net operating income (loss) $752,000 $889,000 $ (137,000)

A study indicates that $375,000 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 12% 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?

Question

Victoria Abbott

Business

4 May, 20:06

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 $4,180,000 $3,100,000 $1,080,000

Variable expenses 1,308,000 891,000 417,000

Contribution margin 2,872,000 2,209,000 663,000

Fixed expenses 2,120,000 1,320,000 800,000

Net operating income (loss) $752,000 $889,000 $ (137,000)

A study indicates that $375,000 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 12% 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?

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Answers (1)

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Serena Frye · Answer 1

Total effect = - $503,080

Explanation:

Giving the following information:

Total Hardware Linens

Sales $1,080,000

Variable expenses 417,000

Contribution margin 663,000

Fixed expenses 800,000

Net operating income (loss) (137,000)

$375,000 of the fixed expenses being charged to Linens are sunk costs.

The elimination of the Linens Department will result in a 12% decrease in the sales of the Hardware Department.

Linens:

Effect on income = net operating income + fixed costs = - 137,000 + 375,000 = - 238,000

Hardware:

Effect on income = - (2,209,000 * 0.12) = - 265,080

Total effect = - 503,080