Answer:
The financial advantage of discontinuing the Linens Department is $359,980
Explanation:
If Linens Department is discontinued, there is only Hardware Department left. The new sales, costs and operating income will be:
Sales = 3,180,000 x (1 -18%) = $2,607,600 ( 18% drop in sales of Hardware given Linens discontinuity)
Variable cost = 2,607,600 x ( 841,000 / 3,180,000) = $689,620.
Fixed cost = Fixed cost originally allocated to Hardware + Fixed cost further allocated to Hardware due to Linen's discontinuity = 1,420,000 + 379,000 = $1,799,000.
Operating income = 2,607,600 - 689,620 - 1,799,000 = $118,980.
=> Difference between discontinuity of Linen Department and continuity of Linen Department = 118,980 - (-241,000) = $359,980.
