What is the financial advantage (disadvantage) of discontinuing the Linens Department?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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
$ 4,210,000
1,297,000
2,913,000
2,250,000
$ 663,000
Department
Linens
$ 1,150,000
413,000
737,000
830,000
Hardware
$ 3,060,000
884,000
2,176,000
1,420,000
$ 756,000
$ (93,000)
A study indicates that $374,000 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 16% decrease in the
sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
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 $ 4,210,000 1,297,000 2,913,000 2,250,000 $ 663,000 Department Linens $ 1,150,000 413,000 737,000 830,000 Hardware $ 3,060,000 884,000 2,176,000 1,420,000 $ 756,000 $ (93,000) A study indicates that $374,000 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 16% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?
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