Bed & Bath, a retailing company, has two departments, Hardware and Linens. The company's most recent monthly contribution format income statement follows:Department Total Hardware LinensSales $ 4,220,000 $ 3,020,000 $ 1,200,000Variable expenses 1,241,000 836,000 405,000Contribution margin 2,979,000 2,184,000 795,000Fixed expenses 2,260,000 1,390,000 870,000Net operating income (loss) $ 719,000 $ 794,000 $ (75,000) A study indicates that $376,000 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 13% 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?

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