Reference no: EM132975761

A merchandising company has two departments, Clothing and Housewares. A recent monthly income statement for the company follows:

                                            Department                    Total                    Clothing Housewares

Sales                                       $2,500,000                   $ 1,750,000.                 $750,000

Less variable expenses                  1,300,000                       900,000.                      400,000

Contribution margin                          1,200,000.                     850,000.                       350,000

Less fixed expenses                           800,000                       400,000                         400,000

Net operating income (loss)                   $400,000                    $450,000-                          $50,000

A study indicates that $160,000 of the fixed expenses being charged to Housewares are sunk costs or allocated costs that will continue even if Housewares is dropped. In addition, the elimination of Housewares will result in a 15% increase in the sales of Clothing.

Required:

Problem 1: If Housewares is dropped, what will be the effect on the net operating income of the company as a whole? Would you recommend Housewares be dropped? Briefly explain why