EXERCISE 12–15 Dropping or Retaining a Segment [LO2] Boyle’s Home Center, a retailing company,… 1 answer below »
EXERCISE 12–15 Dropping or Retaining a Segment [LO2]
Boyle’s Home Center, a retailing company, has two departments, Bath and Kitchen. The com- pany’s most recent monthly contribution format income statement follows:
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 charged 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 the sales of the Kitchen Department.
Required:
If the Bath Department is dropped, what will be the effect on the net operating income of the com- pany as a whole?
