Variable expenses Contribution margin Fixed expenses Net operating income (loss) Department
Total Hardware Linens
Sales $ 4,170,000 3,010,000 $ 1,180,000
Variable expenses 1,231,000 814,000 417,000
Contribution margin 2,959,000 2,196,000 763,000
Fixed expenses 2,180,000 1,340,000 840,000
Net operating
income (loss) $ 779,000 $ 856,000 $ (77,000 )
A study indicates that $375,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 11% decrease in the sales of the Hardware Department.
Required:
What is the financial advantage (disadvantage) of discontinuing the Linens Department?