Differential Analysis: It is analysis which measures the changes in the revenues and costs of a company due to an alternate decision or potential decision. Sunk cost: Sunk costs are the cost which is already spent and cannot be avoided even if the particular department is discontinued or dropped. Determine the financial advantage (disadvantage) of discontinuing the Linens Department

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Chapter 11, Problem 17E

To determine

Differential Analysis:

It is analysis which measures the changes in the revenues and costs of a company due to an alternate decision or potential decision.

Sunk cost:

Sunk costs are the cost which is already spent and cannot be avoided even if the particular department is discontinued or dropped.

Determine the financial advantage (disadvantage) of discontinuing the Linens Department

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Dropping or Retaining a Segment Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly contribution format income statement follows: A study indicates that $340,000 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 10% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Assume a retailing company has two departments-Department A and Department B. The company's most recent contribution format income statement follows: Department A $ 350,000 120,000 230,000 140,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Multiple Choice O $(133,800) The company says that $110,000 of the fixed expenses being charged to Department B are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department B is discontinued the sales in Department A will drop by 6%. What is the financial advantage (disadvantage) of discontinuing Department B? O $(128,000) $(113,800) Total $ 800,000 320,000 480,000 400,000 $ 80,000 O $(124,000) Department B $ 450,000 200,000 250,000 260,000 $90,000 $ (10,000)

3. Dropping or Retaining a Segment 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 Linens 2$ 1,050,000 : $4,100,000 1,396,000 3,050,000 981,000 Sales 415,000 Variable expenses Contribution margin Fixed expenses 2,704,000 2,240,000 2,069,000 1,390,000 635,000 850,000 Net operating income (loss) : $ 464,000 679,000 2$ (215,000) A study indicates that $374,000 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? Show your computations. %24 %24