What will be the effect on the net operating income

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Question - 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

$4,270,000

$3,130,000

$1,140,000

  Variable expenses

1,284,000

874,000

410,000

  Contribution margin

2,986,000

2,256,000

730,000

  Fixed expenses

2,290,000

1,410,000

880,000

  Net operating income (loss)

$696,000

$846,000

$(150,000)

A study indicates that $375,000 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 18% 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?

Reference no: EM131799113

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