Exercise 12-17 Dropping or Retaining a Segment [LO12-2] Bed & Bath, a retailing company, has...
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Exercise 12-17 Dropping or Retaining a Segment [LO12-2]
Bed & Bath, a retailing company, has two departmentsHardware and Linens. The companys most recent monthly contribution format income statement follows:
Department
Total
Hardware
Linens
Sales
$
4,150,000
$
3,020,000
$
1,130,000
Variable expenses
1,301,000
896,000
405,000
Contribution margin
2,849,000
2,124,000
725,000
Fixed expenses
2,300,000
1,450,000
850,000
Net operating income (loss)
$
549,000
$
674,000
$
(125,000
)
A study indicates that $378,000 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 13% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
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