Question

Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly...

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 $ 4,270,000 $ 3,190,000 $ 1,080,000
Variable expenses 1,236,000 833,000 403,000
Contribution margin 3,034,000 2,357,000 677,000
Fixed expenses 2,200,000 1,400,000 800,000
Net operating income (loss) $ 834,000 $ 957,000 $ (123,000 )

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 15% decrease in the sales of the Hardware Department.

Required:

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

Financial (disadvantage) :

Homework Answers

Answer #1

Calculation of variable cost and contribution margin ratio:

Formula Hardware
variable cost ratio variable expense/sales 833000/3190000=.2611285 or 26.11285%
contribution margin ratio sales-variable cost ratio 100-26.11285= 73.88715%

Calculation of company's Income :

HARDWARE LINEN TOTAL
Sales 3190000(1-.15)= 2711500 0 2711500
less:variable expense 2711500*26.11285%= -708050 0 -708050
contribution margin 2003450 0 2003450
less: Fixed cost -1400000 -374000 -1774000
Net operating income /(loss) 603450 -374000 229450

financial advantage (disadvantage) of discontinuing the Linens Department = Income after discontinuance -Income before discontinuance

              = 229450-123000

             = 106450

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