Question

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: Total Hardware Linens Sales $4,220,000 $3,160,000 $1,060,000   Variable expenses 1,299,000 888,000 411,000   Contribution margin 2,921,000 2,272,000 649,000   Fixed expenses 2,320,000 1,470,000 850,000   Net operating income (loss) $601,000 $802,000 ($201,000)A study indicates that $373,000 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 17% 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 the linen department is dropped the net operating income of the company shall be as follows:

                                                                                            $

Total Sales                                     (1)                               2,622,800

Variable  Expenses                       (2)                                 737.040

Contribution margins                                                        1.885.760

Fixed Costs                                    (3)                                1,843,000

Net Operating Income                                                            42,760

The operating income of the Company shall reduce to $ 42,760 from the $ 601,000 before elimination of Linens Department

Explanation:

1. Total Sales is calculated by taking a 17 % reduction in the sales amount provided, $ 3,160,000 * 83 %  =  $ 2,622,800

2. variable expenses is also reduced by 17 % to be in line with the sales reduction. $ 888.000 * 83 % = $ 737,040

3. The fixed costs have been calculated by adding $ 373,000 to the fixed expenses of Hardware Division, these are sunk costs and would continue to be incurred. $ 1,470,000 + $ 373,000 = $ 1,843,000