Columbus Home Company, a retail company, has two departments, indoor and outdoor
ID: 2347006 • Letter: C
Question
Columbus 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
Total Outdoor Indoor
Sales $ 4,800,000 $ 1,600,000 $ 3,200,000
Variable Expenses 2,000,000 800,000 1,200,000
Contribution Margin 2,800,000 800,000 2,000,000
Fixed expenses 2,400,000 900,000 1,500,000
Net operating income (loss) $ 400,000 $ (100,000) $ 500,000
A study indicates that $500,000 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 calculation. If the Outdoor department is dropped, what will be the effect on the net operating income of the company as a whole?
Effect on net operating income = $
Explanation / Answer
Loss of contribution margin from outdoor (800,000) Reduction in fixed expenses (900-500) 400,000 Margin lost on sales of indoor (2000/3200 * 320) (200,000) Reduced operating income (600,000)