Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Fixed expenses Contribution margin Net operating income (loss) Total $ 4,220,000 1,396,000 2,824,000 2,150,000 $ 674,000 Hardware $ 3,150,000 Department Linens $ 1,070,000 417,000 653,000 850,000 $ 871,000 $ (197,000) 979,000 2,171,000 1,300,000 A study indicates that $375,000 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 12% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department? Financial (disadvantage)

Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter7: Allocating Costs Of Support Departments And Joint Products
Section: Chapter Questions
Problem 30E: A company uses charging rates to allocate service department costs to the using departments. The...
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Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format
income statement follows:
Sales
Variable expenses
Fixed expenses
Contribution margin
Net operating income (loss)
Total
$ 4,220,000
1,396,000
2,824,000
2,150,000
$ 674,000
Hardware
$ 3,150,000
Department
Linens
$ 1,070,000
417,000
653,000
850,000
$ 871,000
$ (197,000)
979,000
2,171,000
1,300,000
A study indicates that $375,000 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 12% decrease in the
sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
Financial (disadvantage)
Transcribed Image Text:Bed & Bath, a retailing company, has two departments-Hardware and Linens. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Fixed expenses Contribution margin Net operating income (loss) Total $ 4,220,000 1,396,000 2,824,000 2,150,000 $ 674,000 Hardware $ 3,150,000 Department Linens $ 1,070,000 417,000 653,000 850,000 $ 871,000 $ (197,000) 979,000 2,171,000 1,300,000 A study indicates that $375,000 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 12% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department? Financial (disadvantage)
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