Ohio Home Company, a retail company, has two departments, indoor and outdoor.
The company's most recent monthly contribution format income statement is
presented below:
Department
TotalOutdoorIndoor
Sales $4,800,000 $1,200,000 $3,600,000
Variable Expenses1,800,000400,0001,400,000
Contribution Margin3,000,000800,0002,200,000
Fixed expenses2,800,0001,000,0001,800,000
Net operating income (loss) $200,000 $(200,000) $400,000
A study indicates that $400,000 of the fixed expenses being charged to the
outdoor department are sunk costs, or allocated costs that will continue
even if the Outdoor department is dropped. In addition, the elimination of
the Outdoor department would result in a 10% decrease in the sales of
the Indoor department.
Ignore the impact of income taxes in your calculations.
If the Outdoor department is dropped, what will be the effect on the net operating
income of the company as a whole?
Here is what I have calculated so far, I am having trouble figuring out the avoidable
expense I need to subtract from my calculations;
1.$ 800,000
2. $2,200,000 * .10 = $220,000
3. $800,000 + 220,000 = $1,020,000
4. $1,020,000 - ? = Effect on net operating income
The company's most recent monthly contribution format income statement is
presented below:
Department
TotalOutdoorIndoor
Sales $4,800,000 $1,200,000 $3,600,000
Variable Expenses1,800,000400,0001,400,000
Contribution Margin3,000,000800,0002,200,000
Fixed expenses2,800,0001,000,0001,800,000
Net operating income (loss) $200,000 $(200,000) $400,000
A study indicates that $400,000 of the fixed expenses being charged to the
outdoor department are sunk costs, or allocated costs that will continue
even if the Outdoor department is dropped. In addition, the elimination of
the Outdoor department would result in a 10% decrease in the sales of
the Indoor department.
Ignore the impact of income taxes in your calculations.
If the Outdoor department is dropped, what will be the effect on the net operating
income of the company as a whole?
Here is what I have calculated so far, I am having trouble figuring out the avoidable
expense I need to subtract from my calculations;
1.$ 800,000
2. $2,200,000 * .10 = $220,000
3. $800,000 + 220,000 = $1,020,000
4. $1,020,000 - ? = Effect on net operating income