Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly contribution format income statement follows: TotalDepartmentHardwareLinensSales$ 4,000,000$ 3,000,000$ 1,000,000Variable expenses1,300,000900,000400,000Contribution margin2,700,0002,100,000600,000Fixed expenses2,200,0001,400,000800,000Net operating income (loss)$ 500,000$ 700,000$ (200,000)A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department.Based on the visualization:The relevant fixed cost in the decision to discontinue the Linens Department is:multiple choice 1$340,000.$460,000.$800,000.$600,000.The total foregone contribution margin associated with dropping the Linens Department is:multiple choice 2$(810,000)$(600,000)$(210,000)$(350,000)Which of the following statements is true?multiple choice 3Discontinuing the Linens Department provides a financial advantage of $150,000.Discontinuing the Linens Department provides a financial (disadvantage) of $(150,000).Discontinuing the Linens Department provides a financial advantage of $350,000.Discontinuing the Linens Department provides a financial (disadvantage) of $(350,000). What if We Drop Linens?$500,000$400,000$300,000$200,000$100,000$0($100,000)($200,000)($300,000)($400,000)($500,000)($600,000)($600,000)CM Lost: Linens$460,000Avoided Fix Costs($210,000)CM Lost: Hardware($350,000)Financial DisadvantageDescriptionCM Lost: LinensAvoided Fix CostsCM Lost: HardwareFinancial Disadvantage

Drop or Continue decisions are very important decisions for a business entity as these decisions…

Answered: The relevant fixed cost in the decision…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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:

	Total	Department
Hardware	Linens
Sales	$ 4,000,000	$ 3,000,000	$ 1,000,000
Variable expenses	1,300,000	900,000	400,000
Contribution margin	2,700,000	2,100,000	600,000
Fixed expenses	2,200,000	1,400,000	800,000
Net operating income (loss)	$ 500,000	$ 700,000	$ (200,000)

A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department.

Based on the visualization:

The relevant fixed cost in the decision to discontinue the Linens Department is:

multiple choice 1
- $340,000.
- $460,000.
- $800,000.
- $600,000.
The total foregone contribution margin associated with dropping the Linens Department is:

multiple choice 2
- $(810,000)
- $(600,000)
- $(210,000)
- $(350,000)
Which of the following statements is true?

multiple choice 3
- Discontinuing the Linens Department provides a financial advantage of $150,000.
- Discontinuing the Linens Department provides a financial (disadvantage) of $(150,000).
- Discontinuing the Linens Department provides a financial advantage of $350,000.
- Discontinuing the Linens Department provides a financial (disadvantage) of $(350,000).

What if We Drop Linens?
$500,000
$400,000
$300,000
$200,000
$100,000
$0
($100,000)
($200,000)
($300,000)
($400,000)
($500,000)
($600,000)
($600,000)
CM Lost: Linens
$460,000
Avoided Fix Costs
($210,000)
CM Lost: Hardware
($350,000)
Financial Disadvantage
Description
CM Lost: Linens
Avoided Fix Costs
CM Lost: Hardware
Financial Disadvantage

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