Question

Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company's most recent monthly contribution format income statement follows: Department Total Hardware Linens Sales $ 4,190,000 $ 3,110,000 $ 1,080,000 Variable expenses 1,264,000 858,000 406,000 Contribution margin 2,926,000 2,252,000 674,000 Fixed expenses 2,290,000 1,480,000 810,000 Net operating income (loss) $ 636,000 $ 772,000 $ (136,000 ) A study indicates that $373,000 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 15% decrease in the sales of the Hardware Department.

Answer 1

By eliminating Linens department net operating income fell by $574,800.00

Explanation:

The question requires that the monthly contribution income statement be prepared when the Linens is closed or eliminated,incorporating the unavoidable fixed costs of $373,000 as well as the fall in sales of Hardware by 15%.

Monthly Contribution Income Statement:

Sales($3,110,000)*(1-15%) $2,643,500.00

Variable expenses($858,000)*(1-15%) ($729,300.00)

Contribution margin $1,914,200.00

Fixed expenses($1,480,000+$373,000) ($1,853,000.00)

Net operating income $61,200.00

Reduction in net operating=$636,000-$61,200.00=$574,800

Alternatively:

Lost contribution from closing Linens department $674,000.00

Lost contribution from Hardware(15%*$2,252,000) $ 337,800.00

Total lost contribution $1,011,800.00

Less avoidable fixed costs($810,000-$373,000) ($437,000.00)

Reduction in profits company-wide $574,800.00