Retail co. has two dept's, indoor and outdoor. The co.'s most recent monthly contribution format income statement is below:
TOTAL OUTDOOR INDOOR
Sales: 4,800,000 1,200,000 3,600,000
Variable Exp's: 1,800,000 400,000 1,400,000
Contribution Margin: 3,000,000 800,000 2,200,000
Fixed Exp's: 2,800,000 1,000,000 1,800,000
Net Operating Income 200,000 (200,000) 400,000 (loss)
A study indicates that $400,000 of the fixed exp's being charged to the Outdoor dept are sunk costs ,or allocated costs that will continue even if the Outdoor dept is dropped. In addition, the elimination of the Outdoor dept. would result ina 10% decrease in the sales of the Indoor Equipment.
Ignore the impact of income taxes in your calculation.
If the Outdoor Department is dropped what will be the effect on the net operating income of the company as a whole?