Steve Company, a retail company, has two departments, "G" and "S". The company's most recent monthly contribution format income statement is presented below. Steve Company, a retail company, has two departments, "G" and "S". The company's most recent monthly contribution format income statement is presented below.
...................................Total..................................G...............................S
Sales....................... $ 6,000,000 ................$ 2,000,000 ............$ 4,000,000
Variable Expenses ...3,000,000...................1,400,000 ................1,600,000
Contribution
Margin ........................3,000,000................. 600,000...........2,400,000
Fixed expenses ........1,800,000,.................800,000 .........1,000,000
Net operating
income (loss) ..............$1,200,000.............$(200,000)............$1,400,000
A study indicates that $350,000 of the fixed expenses being charged to "G" department are sunk costs, or allocated costs that will continue (that is the other department will have to absorb those costs) even if the "G" department is dropped. In addition, the elimination of the "G" department would result in a 10% increase in the sales of the "S" department.