Home Sweet Home, a garden furniture company, has two departments: Decks and Pergolas. A recent monthly income statement for the company follows: Department Decks Pergolas TotalSales$3,000,000 $1,000,000 $4,000,000Less: Variable expenses 900,000 400,000 1,300,000Contribution margin 2,100,000 600,000 2,700,000Less: Fixed expenses 1,400,000 800,000 2,200,000Net operating income (loss)$700,000 $(200,000) $500,000 A study indicates that $240,000 of the fixed expenses being charged to pergolas are sunk costs or allocated costs that will continue even if the pergola department is dropped. In addition, the elimination of the pergola department will result in a 20% decrease in the sales of the decks department. Required:If the pergola department is dropped, what will be the effect on the net operating income of the company as a whole? Net Operating Income ____________by _________________

Operating income: Income statement reports revenues and expenses from business operations, and the…

Answered: Home Sweet Home, a garden furniture…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

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Home Sweet Home, a garden furniture company, has two departments: Decks and Pergolas. A recent monthly income statement for the company follows:

	Department
	Decks		Pergolas		Total
Sales	$	3,000,000		$	1,000,000		$	4,000,000
Less: Variable expenses		900,000			400,000			1,300,000
Contribution margin		2,100,000			600,000			2,700,000
Less: Fixed expenses		1,400,000			800,000			2,200,000
Net operating income (loss)	$	700,000		$	(200,000	)	$	500,000

A study indicates that $240,000 of the fixed expenses being charged to pergolas are sunk costs or allocated costs that will continue even if the pergola department is dropped. In addition, the elimination of the pergola department will result in a 20% decrease in the sales of the decks department.

Required:
If the pergola department is dropped, what will be the effect on the net operating income of the company as a whole?

Net Operating Income ____________by _________________

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