Reference no: EM132633120

Contemporary Trends sells paint and paint supplies carpet and wallpaper at a single store location in suburban Baltimore Although the company has been very profitable over the year management has seen very profitable over the year management has seen a significant decline in wallpaper sales and earnings Much of this decline is attributable to the internet and to companies that advertise deeply discounted prices in magazines and offer customer free shipping and toll free telephone number recent figures follow:

                                                    Paint and supplies                 Carpeting                       wallpaper

Sales                                         190,000                             230,000                     70,000

Less variable cost                         114,000                              161,000                  56,000

Fixed costs                                    28,000                                 37,500                  22,000

Total cost                                          142,000                            198,500                 78,000

operating income                                48,000                                   31,500                  -8000

Question 1: Management is studying whether to drop wallpaper because of the changing market and accompanying loss if the line is dropped the following changes are expected to occur

a. The vacated space will be remodeled at a cost of 15,000 and will be devoted to an expanded line of high and carpet sales of carpet are expected to increase by 100,000

b. Contemporary can cut wallpapers fixed costs by 50%

c. Sales of paint and paint supplies are expected to fall by 30%

d. Considering (a), (b) and (c), explain your decision whether to drop or retain the wallpaper