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

New Income Statement

Department Department

Hardware Linens Total Hardware Linens Total

Sales $$3,000,000$ $$1,000,000$ $$4,000,000$ Sales

Less: Variable expenses $900,000400,0001,300,000$ Less: Variable expenses

Contribution margin $2,100,000600,0002,700,000$ Contribution margin

Less: Fixed expenses $1,400,000800,0002,200,000$ Less: Fixed expenses

Operating income $($loss$)$ $$700,000-$$$200,000$ $$500,000$ Operating income $($loss$)$

A study indicates that $$240,000$ 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 $20\%$ 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?

List $1$

Lost contribution margin: Contribution margin

Hardware department:

Linens department:

Percentage

Sunk fixed expenses

Total fixed expenses

Total lost contribution margin:

Fixed expenses saved$/$avoided:

Total fixed expenses saved$/$avoided

Net increase $($decrease$)$ in net operating income

List $2$

Decision: Drop the Linens department

Keep the Linens department

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