Part A.
A merchandising company has two departments, Clothing and Housewares. A recent monthly income statement for the company follows:
			Department
		Total	Clothing	Housewares
	Sales	$2,500,000	$1,750,000	$750,000
	Less variable expenses	1,300,000	900,000	400,000
	Contribution margin	1,200,000	850,000	350,000
	Less fixed expenses	800,000	400,000	400,000
	Net operating income (loss)	$400,000	$450,000	-$50,000
A study indicates that $160,000 of the fixed expenses being charged to Housewares are sunk costs or allocated costs that will continue even if Housewares is dropped. In addition, the elimination of Housewares will result in a 15% increase in the sales of Clothing.
Required:
Part A.
If Housewares is dropped, what will be the effect on the net operating income of the company as a whole? Would you recommend Housewares be dropped? Briefly explain why. (7 marks)