Question

Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. The company’s most recent monthly contribution format income statement follows:

				Department
	Total			Bath			Kitchen
Sales	$	4,230,000		$	1,160,000		$	3,070,000
Variable expenses		1,329,000			404,000			925,000
Contribution margin		2,901,000			756,000			2,145,000
Fixed expenses		2,310,000			860,000			1,450,000
Net operating income (loss)	$	591,000		$	(104,000	)	$	695,000

A study indicates that $373,000 of the fixed expenses being charged to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 12% decrease in the sales of the Kitchen Department.

Required:

If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole? (Input the amount as a positive value. Omit the "$" sign in your response.)

Answer 1

Effect on net operating income if the bath department is dropped:-

Sales (Kitchen dept - decrease @ 12%)	2701600
Less: Variable costs (Kitchen dept - decrease @ 12%)	814000
Contribution Margin	1887600
Less: Fixed Expenses (373000+1450000)	1823000
Net Operating Income	64600

Hence the net operating income of the company as a whole after deducting all the fixed and sunk costs will be 64,600 if the bath department is dropped.