Bed Bath a retailing company has two departmentsHardware an

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 Variable expenses Contribution margin Fixed expenses Net operating income (loss) $ 4,250,000 $ 3,180,000 $ 1,070,000 401,000 669,000 830,000 920,000 1,321,000 2,929,000 2,260,000 2,280,000 1,450,000 649,000 $810,000 (161,000) A study indicates that $380,000 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 19% decrease in the sales of the Hardware Department. Required What is the financial advantage (disadvantage) of discontinuing the Linens Department? inancial (disadvantage)

Solution

contribution margin ratio of hardware division= contribution /sales

               = 2260000/3180000

               = .7107 or 71.07%

decrease in sales of hardware division = 3180000*.19 =604200

loss of contribution of hardware division due to decrease in sales = 604200*.7107 = $ 429,400 rounded

If linens division is discontinued ,there will be no contribution .Also only allocated cost will be incurred rest of the fixed cost is avoidable.

Financial disadvantage from closing linen division = loss due to closing - existing loss

                          = -809400-(-161000)

                          = -809400+161000

                          = - 648400

Allocated cost if linen division is closed	-380000
loss of contribution from hardware division	-429400
Total loss from closing Linen division	-809400