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	$	4,150,000		$	3,020,000		$	1,130,000
Variable expenses		1,244,000			833,000			411,000
Contribution margin		2,906,000			2,187,000			719,000
Fixed expenses		2,320,000			1,490,000			830,000
Net operating income (loss)	$	586,000		$	697,000		$	(111,000	)

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 18% decrease in the sales of the Hardware Department.

Required:

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

Answer 1

Answer :- Calculation of the financial advantage(disadvantage) of discontinuing the Linens Department:-

Contribution Margin lost if the Linens department is dropped :-

Lost from the Linens department = ($719,000)

Lost from the Hardware department = ($393,660) [$2,187,000*18%]

Total lost Contribution Margin = ($1,112,660)

Fixed cost that can be avoided = $458,000 ($830,000-$372,000)

Financial (Disadvantage) of discontinuing Linens department = ($654,660)

If you have any query ask in comment section. If you like the answer plz rate. Thanks