Reference no: EM132515240

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.

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 ifthe 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:

Question 1: What is the financial advantage (disadvantage) of discontinuing the Linens Department?