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Dropping or retaining a department

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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?

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Solution Summary

This provides an example of determining whether or not a given department should be dropped based on net income.

$2.19