Bed & Bath, a retailing company, has two departments: Hardware and Linens.
The company's most recent monthly contribution format income statement follows:
Total Hardware Linens
Sales $4,180,000 $3,100,000 $1,080,000
Variable expenses 1,308,000 891,000 417,000
Contribution margin 2,872,000 2,209,000 663,000
Fixed expenses 2,120,000 1,320,000 800,000
Net operating income (loss) $752,000 $889,000 $ (137,000)
A study indicates that $375,000 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 12% decrease in the sales of the Hardware Department.
Required:
If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?
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