Question

Exercise 12-17 Dropping or Retaining a Segment [LO12-2]

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	$	4,090,000		$	3,010,000		$	1,080,000
Variable expenses		1,403,000			986,000			417,000
Contribution margin		2,687,000			2,024,000			663,000
Fixed expenses		2,370,000			1,480,000			890,000
Net operating income (loss)	$	317,000		$	544,000		$	(227,000	)

A study indicates that $379,000 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 14% decrease in the sales of the Hardware Department.

Required:

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

Answer 1

Lost from the Linen Department						663,000
lost from the Hardware department				(2,024,000*14%)		283360
total contribution margin lost						946,360
Savings in fixed cost			(890,000-379,000)			511000
Decrease in profits for the company as whole						435,360
financial disadvantage				435,360
(input the answer figure as negative if required)