Spilker Linens Store has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:
Based on this income statement, management is planning on eliminating the Bedding department, as it is generating a net loss. If the Bedding department is eliminated, the Kitchen department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of Bedding's allocated expenses will be avoided, but they will be reallocated to Bath and Kitchen. Bath will be allocated $100,000 additional expenses, and Kitchen will be allocated $75,000 additional expenses. Prepare a new income statement for Spilker Linens Store, showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

Question

Spilker Linens Store has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:
  Based on this income statement, management is planning on eliminating the Bedding department, as it is generating a net loss. If the Bedding department is eliminated, the Kitchen department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of Bedding's allocated expenses will be avoided, but they will be reallocated to Bath and Kitchen. Bath will be allocated $100,000 additional expenses, and Kitchen will be allocated $75,000 additional expenses. Prepare a new income statement for Spilker Linens Store, showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

Quizplus · Accepted Answer

The Answer of Spilker Linens Store has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:
  Based on this income statement, management is planning on eliminating the Bedding department, as it is generating a net loss. If the Bedding department is eliminated, the Kitchen department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of Bedding's allocated expenses will be avoided, but they will be reallocated to Bath and Kitchen. Bath will be allocated $100,000 additional expenses, and Kitchen will be allocated $75,000 additional expenses. Prepare a new income statement for Spilker Linens Store, showing the results if the Bedding Department is eliminated and indicate whether eliminating the department is advisable.

Spilker Linens Store Has Three Departments: Bath, Kitchen, and Bedding