Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows: 

A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department.

Required:

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

 

Department Total Hardware Linens $4,170,000 $3,050,000 $1,120,000 1,332,000 929,000 403,000 2,838,000 2,121,000 717,000 Fixed expenses 2,140,000 1,320,000 820,000 Net operating income (loss) $698,000 $801,000 $ (103,000) Sales Variable expenses Contribution margin