Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

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:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Department Total Hardware Linens $4,000,000 S3,000,000 Sales S1,000,000 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 $ 500,000 S 700,000 S (200,000) Net operating income (loss)