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

[tex]\[
\begin{array}{|c|c|c|c|}
\hline
& \text{Total} & \text{Hardware} & \text{Linens} \\
\hline
\text{Sales} & \$4,180,000 & \$3,140,000 & \$1,040,000 \\
\hline
\text{Variable expenses} & \$1,364,000 & \$959,000 & \$405,000 \\
\hline
\text{Contribution margin} & \$2,816,000 & \$2,181,000 & \$635,000 \\
\hline
\text{Fixed expenses} & \$2,180,000 & \$1,340,000 & \$840,000 \\
\hline
\text{Net operating income (loss)} & \$636,000 & \$841,000 & \$(205,000) \\
\hline
\end{array}
\][/tex]

A study indicates that \$379,000 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 16% decrease in the sales of the Hardware Department.

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

[tex]\[\boxed{\text{Answer here}}\][/tex]

Sagot :

GinnyAnsweridn
To determine the financial impact of discontinuing the Linens Department, we need to perform a detailed analysis. We'll evaluate the current financial performance and forecast the financial outcome after discontinuation considering both the fixed and variable expenses, and adjusting for changes in sales in the Hardware Department.

### Step 1: Current Contribution Margin Calculation
The contribution margin for each department is already provided:
- Hardware: \[tex]$2,181,000 - Linens: \$[/tex]635,000

### Step 2: Total Contribution Margin Before Discontinuation
The total contribution margin before discontinuation is the sum of the contribution margins from both departments:
[tex]\[ \text{Total Contribution Margin Before} = \$2,181,000 + \$635,000 = \$2,816,000 \][/tex]

### Step 3: Operating Income Before Discontinuation
The operating income before discontinuation can be calculated by subtracting the total fixed expenses from the total contribution margin:
[tex]\[ \text{Total Fixed Expenses} = \$1,340,000 \text{ (Hardware)} + \$840,000 \text{ (Linens)} = \$2,180,000 \][/tex]
[tex]\[ \text{Operating Income Before} = \$2,816,000 - \$2,180,000 = \$636,000 \][/tex]

### Step 4: Impact of Discontinuing the Linens Department
#### Reduced Sales in Hardware Department:
Discontinuing the Linens Department would result in a 16% decrease in Hardware sales. Calculate the new sales for the Hardware department:
[tex]\[ \text{Reduced Sales} = \$3,140,000 \times (1 - 0.16) = \$3,140,000 \times 0.84 = \$2,637,600 \][/tex]

#### Contribution Margin for Hardware After Discontinuation:
Determine the new contribution margin for the Hardware department by maintaining the same variable expenses:
[tex]\[ \text{New Contribution Margin for Hardware} = \$2,637,600 - \$959,000 = \$1,678,600 \][/tex]

#### Total Contribution Margin After Discontinuation:
After the Linens department is discontinued, only the hardware contribution margin remains:
[tex]\[ \text{Total Contribution Margin After} = \$1,678,600 \][/tex]

### Step 5: Fixed Costs After Discontinuation
Include the fixed costs for the Hardware department and the sunk fixed costs from the Linens department:
[tex]\[ \text{Fixed Costs After} = \$1,340,000 + \$379,000 = \$1,719,000 \][/tex]

### Step 6: Operating Income After Discontinuation
[tex]\[ \text{Operating Income After} = \$1,678,600 - \$1,719,000 = -\$40,400 \][/tex]

### Step 7: Financial Advantage/Disadvantage
Finally, calculate the financial impact of discontinuing the Linens department by comparing the operating income before and after:
[tex]\[ \text{Financial Advantage/Disadvantage} = \text{Operating Income After} - \text{Operating Income Before} \][/tex]
[tex]\[ = -\$40,400 - \$636,000 = -\$676,400 \][/tex]

### Conclusion:
The financial disadvantage of discontinuing the Linens Department is \$676,400.
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