Bed & Bath, a retailing company, has two departments: hardware and linens. A recent monthly income statement for the company 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?

Transcribed Image Text:

Department Linens Hardware Total Sales $4,000,000 $3,000,000 $1,000,000 Less: Variable expenses 900,000 400.000 1,300,000 Contribution margin 2,700,000 2,100,000 600,000 Less: Fixed expenses 2,200,000 1,400,000 800,000 Net operating income (loss) $ 700,000 $ 500,000 $ (200,000)