Reference no: EM132535949

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

Department                          Total                     Hardware                           Linens

Sales                               $4,080,000          $3,030,000                 $1,050,000

Variable expenses                 1,339,000               925,000                     414,000

Contribution margin                 2,741,000              2,105,000                   636,000

Fixed expenses                          2,130,000                   1,310,000                820,000

Net operating income (loss)              $611,000                   $795,000                $(184,000)

• A study indicates that $376,000 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:

Question 1: What is the financial advantage (disadvantage) of discontinuing the Linens Department?