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 | $ | 4,100,000 | $ | 3,080,000 | $ | 1,020,000 | |||
| Variable expenses | 1,292,000 | 882,000 | 410,000 | ||||||
| Contribution margin | 2,808,000 | 2,198,000 | 610,000 | ||||||
| Fixed expenses | 2,150,000 | 1,310,000 | 840,000 | ||||||
| Net operating income (loss) | $ | 658,000 | $ | 888,000 | $ | (230,000 | ) | ||
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 13% 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=2,198,000*(1-Decrease in Growth)
=2,198,000*(1-0.13)=1912260
Less:Fixed cost for Hardware=(1.310,000)
Net operating income for Hardware=$602260
Less:Unavoidable fixed cost of Linens=(372,000)
Total net operating income=$230260
Hence financial disadvantage=(658,000-230260)
=$427740
Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly...