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	$	4,120,000		$	3,050,000		$	1,070,000
Variable expenses		1,315,000			905,000			410,000
Contribution margin		2,805,000			2,145,000			660,000
Fixed expenses		2,320,000			1,450,000			870,000
Net operating income (loss)	$	485,000		$	695,000		$	(210,000	)

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 11% decrease in the sales of the Hardware Department.

Required:

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

looking for someone to help in the process of finding this answer

Answer 1

What is the financial advantage (disadvantage) of discontinuing the Linens Department?
Contribution margin lost if the Linens Department is dropped:
Lost from the Linens Department	$ (660,000.00)
Lost from the Hardware Department (11% × $2,145,000)	$ (235,950.00)
Total lost contribution margin	$ (895,950.00)
Fixed costs that can be avoided ($870,000 – $374,000)	$  496,000.00
Financial (disadvantage) of discontinuing the Linens Department	$ (399,950.00)