Question
Bed & Bath, a retailing company, has two departmentsHardware and Linens. The company's most recent monthly contribution format income statement follows: DepartmentTotalHardwareLinens Sales $4,080,000$3,030,000$1,050,000 Variable
Bed & Bath, a retailing company, has two departmentsHardware and Linens. The company's most recent monthly contribution format income statement follows:
DepartmentTotalHardwareLinens
Sales $4,080,000$3,030,000$1,050,000
Variable expenses1,339,000925,000414,000
Contribution margin2,741,0002,105,000636,000Fixed expenses2,130,0001,310,000820,000
Net operating income (loss)$611,000$795,000$(184,000)
A study indicates that $376,000 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 20% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
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