8 Bed Bath a retailing company has two departments Hardware

8. Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company\'s most recent monthly contribution format income statement follows Total $3120.000 400.000 Linens 400,000 830,000 Hardware $4,200,000 $3,120,000 $1,080,000 Sales Variable expenses Contribution margin Fixed expenses 329,000 929,000 2,871,000 2,191,000 680,000 1.360.000 2.190,000 1 operating income 681,000 831,000 $(150,000) (oss) A study dicates that S373 000 of the f d expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Deparment is dropped. In addition, the elimination of the Linens Department wil result in a 19% decrease in the sales of the Hardware Department. Required: If the Linens Department is dropped, what wl be the effect on the net operating income of the company as a whole?

Solution

Contribution margin ratio for Hardware=Contribution margin/Sales

=(2191000/3120000)=0.702243589

New sales for Hardware=$3120000(1-0.19)=$2527200

Hence new Contribution margin for Hardware=(2527200*0.702243589)=$1774710

Less:Fixed expenses for Hardware=($1360000)

Net operating income for Hardware=$414710

Hence overall Net operating income=Net operating income for Hardware-Fixed expenses for Linens department(unavoidable)

=(414710-373000)=$41710

Hence decrease in Net operating income=(681000-41710)=$639290.