Answer:
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
There will be a negative impact in the operating income equal to -$693,600
.
Explanation:
The scenario with the company fully operational is detailed below:
Hardware Linens Total Income Statement
$ 3,020,000 $ 1,200,000 $ 4,220,000 Total Net Sales
-$ 836,000 -$ 405,000 -$ 1,241,000 Variable Cost
$ 2,184,000 $ 795,000 $ 2,979,000 Operating Income
-$ 1,390,000 -$ 870,000 -$ 2,260,000 Direct Fixed Costs
$ 794,000 -$ 75,000 $ 719,000 Net Operating Income
If the company dropped the Linens Department the resault are as follows:
Hardware Linens Total Income Statement
$ 2.627,400 $ 0,000 $ 2.627,400 Total Net Sales
-$ 836,000 $ 0,000 -$ 836,000 Variable Cost
$ 1.791,400 $ 0,000 $ 1.791,400 Operating Income
-$ 1.390,000 -$ 376,000 -$ 1.766,000 Direct Fixed Costs
$ 401,400 -$ 376,000 $ 25,400 Net Operating Income
- The new operating Income it's $25,400 , which means a decrease in operating income aproximately of $-693,600