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 Nat operating Income (los) Department Total Hardware Linens $ 4,260,000 $3,140,000 $1,120,000 1,370,000 958,000 412,000 2,890,000 2,182,000 708,000 2,170,000 1,310,000 B60,000 $ 720,000 $ 872,000 $ (152,000) A study indicates that $372,000 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 11% 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

$ (460,020)

Working

Net operating income before discontinuing linens	$ 720,000
Net operating income after discontinuing linens	$ 259,980
Net financial Disadvantage of Discontinuing linens department	$ 460,020

.

Working		Total	Hardware	Linens
A	Sales	$ 2,794,600	$ 2,794,600
B	Variable expenses	$ 852,620	$ 852,620
C=A-B	Contribution margin	$ 1,941,980	$ 1,941,980	$ 0
D	Fixed expenses	$ 1,682,000	$ 1,310,000	$ 372,000
E=C-D	Net Operating Income (Loss)	$ 259,980	$ 631,980	-$ 372,000

If linen is discontinued all sales revenue and variable cost will be eliminated but fixed cost of 372000 will still be incurred which increase the loss from $152000 to $372000.