Discontinue or Keep? A local home improvement warehouse store shows the following product line income statement for the month. All common fixed costs are allocated to departments based on percentage of sales revenue generated by the department. Paint Lumber Lighting Sales $500,000 $400,000 $100,000 STORE TOTAL $1,000,000 Variable Expenses 300,000 160,000 50,000 510,000 Contribution Margin 200,000 240,000 50,000 490,000 Less: Direct Fixed 50,000 40,000 35,000 125,000 Expenses Less: Common Fixed Costs 100,000 80,000 20,000 200,000 Operating Income (Loss) $50,000 $120,000 $(5,000) $165,000 Scenario #1: Assuming $30,000 of the Lighting Department's direct fixed costs are avoidable, should the store managers discontinue the Lighting Department? Scenario #2: The space currently occupied by the Lighting Department would be replaced with a Hardware Department that is expected to have sales of $200,000, variable costs of $80,000 and new direct fixed costs of $30,000. Sales VC CM FC OP INC Should the company replace the lighting department with the hardware department? Lost CM (from lighting) Additional OP INC from New Hardware Department Increase (Decrease) in OP INC