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	$	4,330,000		$	3,180,000		$	1,150,000
Variable expenses		1,245,000			825,000			420,000
Contribution margin		3,085,000			2,355,000			730,000
Fixed expenses		2,370,000			1,480,000			890,000
Net operating income (loss)	$	715,000		$	875,000		$	(160,000	)

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

Disadvantage of discontuining the Linen Department?

Contribution would be reduced by $730000 which affects overall operating gearing of the company.

Fixed expense of $ 372000 has to given even if the linen department is discontinued .This become additional burden for the company and affect the net profit .This expense not puts extra benefict for the company as the linen department is discontinued.

There will be decrease in sales revenue of 18% of hardware department also.This will affect overall company .The shows both department are related to some extent in sales .So it is not good to discontinue line department.