Question

Total Hardware Linens Sales $ 4,390,000 $ 3,190,000 $ 1,200,000 Variable expenses 1,257,000 841,000 416,000 Contribution margin 3,133,000 2,349,000 784,000 Fixed expenses 2,210,000 1,390,000 820,000 Net operating income (loss) $ 923,000 $ 959,000 $ (36,000 ) 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?

Answer 1

Answer:

disadvantage for 342,000 dollars

Explanation:

$\left[\begin{array}{cccc}&Discontinued&Continued&Differential\\ contribution&0&784,000&-784,000\\ tracable fixed cost&&-442,000&442,000\\ operating income&0&342,000&-342,000\\ allocate fixed&-378,000&-378,000&0\\ Result&-378,000&-36,000&-342,000\\\end{array}\right]$

We should calculate if the income with the own fixed cost for Linens is positive

total fixed cost           784,000

allocate fixed cost    (378,000)

     tracable fixed      442,000

we check if the division can manage to pay up their own fixed cost

and we deternate that it earn 342,000 dollars if we discontinued we all this income which absorp a portion of the fixed cost will be eliminate making the income statement worse