Question

Sales $ 4,210,000 $ 3,040,000 $ 1,170,000 Variable expenses 1,313,000 903,000 410,000 Contribution margin 2,897,000 2,137,000...

Sales $ 4,210,000 $ 3,040,000 $ 1,170,000 Variable expenses 1,313,000 903,000 410,000 Contribution margin 2,897,000 2,137,000 760,000 Fixed expenses 2,310,000 1,420,000 890,000 Net operating income (loss) $ 587,000 $ 717,000 $ (130,000 ) 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 18% decrease in the sales of the Hardware Department.

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 18% decrease in the sales of the Hardware Department.

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

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Answer #1
Answer:
Particulars Amount (in $ )
Contribution Lost from the Linens Department $ 760,000
Add: Contribution Lost from the Hardware Department
                     ( $ 2,137,000 x 18% )		 $ 384,660
Total Contribution margin Lost $ 1,144,660
Less : Avoidable Fixed costs
             ( $ 890,000 (-) $ 374,000 )		 ($ 516,000)
Financial disadvantage of discontinuing the Linens Department $ 628,660
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