Bed Bath a retailing company has two departments Hardware a

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company\'s most recent monthly contribution format income statement follows: Department Total inens Sales Variable e $4,220,000 $3,070,000 $1,150,000 1,266,000 864,000 402,000 es Contribution margin Fixed expenses 2,954,000 2,206,000 748,000 2,260,000 1,460,000 800,000 Net operating income (loss) 694,000 S 746,000 S (52,000) 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 19% 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? in net operating income

Solution

Computation of change in net income if Linen Department is dropped:

Lost contribution from Lines Department

$ 748,000

Add: Lost contribution from Hardware Department ($ 2,206,000 x 0.19)

$ 419,140

Total lost contribution margin

$1,167,140

Less: Avoidable fixed cost ( $ 800,000 - $ 372,000)

$ 428,000

Decrease in profit for the company as a whole

$   739,140

On dropping the Lines Department net operating income will decrease by $ 739,140.

Lost contribution from Lines Department	$ 748,000
Add: Lost contribution from Hardware Department ($ 2,206,000 x 0.19)	$ 419,140
Total lost contribution margin	$1,167,140
Less: Avoidable fixed cost ( $ 800,000 - $ 372,000)	$ 428,000
Decrease in profit for the company as a whole	$   739,140