Question
Bed & Bath, a retailing company, has two departmentsHardware and Linens. The companys most recent monthly contribution format income statement follows: Total Department Hardware Linens
Bed & Bath, a retailing company, has two departmentsHardware and Linens. The companys most recent monthly contribution format income statement follows:
| Total | Department | ||
|---|---|---|---|
| Hardware | Linens | ||
| Sales | $ 4,080,000 | $ 3,040,000 | $ 1,040,000 |
| Variable expenses | 1,237,000 | 830,000 | 407,000 |
| Contribution margin | 2,843,000 | 2,210,000 | 633,000 |
| Fixed expenses | 2,310,000 | 1,470,000 | 840,000 |
| Net operating income (loss) | $ 533,000 | $ 740,000 | $ (207,000) |
A study indicates that $378,000 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 12% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
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Where Does Money Grow
Authors: Beth McGuinness
1070202150, 978-1070202150
