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 $ 4,300,000 $ 3,130,000 $ 1,170,000 Variable expenses 1,403,000 994,000 409,000 Contribution margin 2,897,000 2,136,000 761,000 Fixed expenses 2,250,000 1,350,000 900,000 Net operating income (loss) $ 647,000 $ 786,000 $ (139,000 ) 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 20% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Bed & Bath

The financial disadvantage of discontinuing the Linens Department is:

= $1,004,000.

Explanation:

a) Data and Calculations:

Department                                  Total         Hardware        Linens

Sales                                     $ 4,300,000   $ 3,130,000   $ 1,170,000

Variable expenses                   1,403,000        994,000        409,000

Contribution margin                2,897,000     2,136,000         761,000

Fixed expenses                       2,250,000    1,350,000        900,000

Net operating income (loss)   $ 647,000    $ 786,000     $ (139,000 )

The financial disadvantage of discontinuing the Linens Department is:

Allocated fixed costs = $378,000

Hardware sales lost =    626,000 ($3,130,000 * 20%)

Total disadvantage = $1,004,000

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explanation:

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