Answer:
The financial disadvantage of discontinuing the Linens Department is a decrease of $440,000 in total net operating profit.
Explanation:
Note: The requirement of this question is omitted but it is provided before answering the question to complete question as follows:
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?
The explanation of the answer is now provided as follows:
Note: See the lower part of the attached excel file for Determination of the financial advantage (disadvantage) (in bold red color) of discontinuing the Linens Department.
In the attached excel file, it can be seen that discontinuing the Linens Department makes both its Sales and Variable Cost to be equal to zero while only its Fixed expenses falls from $800,000 to $340,000 which is sunk costs.
Since the elimination of the Linens Department will result in a 10% decrease in the sales of the Hardware Department, the sales of the Hardware Department after eliminating Linens Department is calculated as follows:
Sales of the Hardware Department after eliminating Linens Department = $3,000,000 * (100% - 10%) = $270,000
From the attached excel file, it can be seen that the total net operating income falls from $500,000 to $60,000 after eliminating Linens Department. This implies that the total net operating profit decreases by $440,000 (i.e. $500,000 - $60,000 = $440,000)
Therefore, the financial disadvantage of discontinuing the Linens Department is a decrease of $440,000 in total net operating profit.
