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 | $ | 3,110,000 | $ | 1,180,000 | |||
| Variable expenses | 1,390,000 | 971,000 | 419,000 | ||||||
| Contribution margin | 2,900,000 | 2,139,000 | 761,000 | ||||||
| Fixed expenses | 2,160,000 | 1,320,000 | 840,000 | ||||||
| Net operating income (loss) | $ | 740,000 | $ | 819,000 | $ | (79,000 | ) | ||
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 12% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
Contribution margin for Hardware would be=2,139,000*(1-0.12)=$1882320
Less:Fixed cost for Hardware=(1,320,000)
Net operating income for Hardware=$562320
Less:Unavoidable fixed cost for Linens=(372,000)
Total net operating income would be=$190320
Hence financial disadvantage=740,000-190320
=$549680
Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly...