Question

Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows:
A study indicates that 340,000 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 10% decrease in the sales of the Hardware Department.
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Answer 1

For this problem, we are required to calculate the net operating income.

In order to answer the question, we will first calculate the impact of the changes on the Hardware department. Then we will add the remaining fixed costs that are currently charged to Linens that will continue.

To calculate net operating income, subtract operating expenses from the revenue generated by a property. Revenue from real Hardware department estate includes rental income, parking fees, service changes, vending machines, laundry machines, and so on.

Net income, also known as the bottom line, Hardware department indicates a business's profitability. It shows how much profit is left from revenue after accounting for expenses and liabilities. Net income is profit that can be distributed to business owners or shareholders or invested in business growth.

A corporation's positive net income causes an increase in the retained earnings, which is part of stockholders' equity. A net loss will cause a decrease in retained earnings and stockholders' equity.

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