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	$	4,340,000		$	3,150,000		$	1,190,000
Variable expenses		1,361,000			946,000			415,000
Contribution margin		2,979,000			2,204,000			775,000
Fixed expenses		2,220,000			1,380,000			840,000
Net operating income (loss)	$	759,000		$	824,000		$	(65,000	)

A study indicates that $378,000 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 16% decrease in the sales of the Hardware Department.

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Answer 1

Answer- If Linens Department is dropped ,then sunk costs $378000 will conitinue occur.Other cost like variable cost and Remaining part of the fixed expenses should not be occured and in addition the elimination will result in a 16 % decrease in the sales of the hardware department.When sale of the hardware department decrease then variable cost should also decrease by 16% and fixed cost remain same i.e $1380000.

Net opearting income after linens department is closed

Particulars	Total	Hardware	Linens
Sales	$2646000	$2646000( 3150000-16% of 3150000)	-
Variable expenses	$794640	$794640($946000-16% of $946000)	-
Contribution Margin	$1851360	$1851360
Fixed Expenses	$1758000	$1380000	$378000
Net Operating income(Loss)	$93360	$471360	($378000)

Firms Opearting income decrease to $93360.