Reference no: EM132418635
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 $4,000,000 $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.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?