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	$	4,350,000		$	3,190,000		$	1,160,000
Variable expenses		1,309,000			908,000			401,000
Contribution margin		3,041,000			2,282,000			759,000
Fixed expenses		2,350,000			1,450,000			900,000
Net operating income (loss)	$	691,000		$	832,000		$	(141,000	)

A study indicates that $374,000 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 20% decrease in the sales of the Hardware Department.

Required:

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

Answer 1

		Department
	Total		Hardware	Linens
Sales	$25,52,000.00	$3190000 - 20% of $3190000	$25,52,000.00	$                -
Variable expenses	$ 7,26,400.00	$908000 - 20% of $908000	$ 7,26,400.00	$                -
Contribution margin	$18,25,600.00		$18,25,600.00	$                -
Fixed expenses	$18,24,000.00		$14,50,000.00	$ 3,74,000.00
Net operating income (loss)	$       1,600.00		$ 3,75,600.00
Variable cost will vary proportionately with sales
Net operating Income before discontinue of lines department		$                                   6,91,000.00
Net operating Income after discontinue line department		$                                         1,600.00
Financial disavantage		$                                   6,89,400.00