Question: Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. The company’s most recent monthly contribution format income statement follows:
|
|
Department
|
|
|
Total
|
Bath
|
Kitchen
|
|
Sales
|
$5,000,000
|
$1,000,000
|
$4,000,000
|
|
Variable expenses
|
1,900,000
|
300,000
|
1.600,000
|
|
Contribution margin
|
3,100,000
|
700,000
|
2,400,000
|
|
Fixed expenses
|
2,700,000
|
900,000
|
1,800,000
|
|
Net operating income (loss)
|
$400,000
|
$(200,000)
|
$600,000
|
A study indicates that $370,000 of the fixed expenses being charge to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10% decrease in sales of the Kitchen Department.
If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole?