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	$	4,290,000		$	3,170,000		$	1,120,000
Variable expenses		1,262,000			851,000			411,000
Contribution margin		3,028,000			2,319,000			709,000
Fixed expenses		2,180,000			1,310,000			870,000
Net operating income (loss)	$	848,000		$	1,009,000		$	(161,000	)

A study indicates that $379,000 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 18% decrease in the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

Solution

Net financial Disadvantage of Discontinuing linens department

$      (635,420.00)

Working

Net operating income before discontinuing linens	$ 848,000
Net operating income after discontinuing linens	$ 212,580
Net financial Disadvantage of Discontinuing linens department	$      (635,420.00)

.

	Total	Hardware	Linens
Sales	$ 2,599,400.00	$ 2,599,400.00
Variable expenses	$      697,820.00	$      697,820.00
Contribution margin	$ 1,901,580.00	$ 1,901,580.00	$                     -
Fixed expenses	$ 1,689,000.00	$ 1,310,000.00	$   379,000.00
Net Operating Income (Loss)	$      212,580.00	$      591,580.00	$ (379,000.00)