Reference no: EM132637320

Much of this decline is attributable to the Internet and to companies that advertise deeply discounted prices in magazines and offer customers free shipping and toll-free telephone numbers. Recent figures follow. Paint and Supplies Carpeting

Wallpaper $190,000 $230,000 $70,000

Variable Costs .......minute $114,000 $161,000 $56,000

Fixed costs 28,000 37,500 22,500 $142,000 $198,500 $78,500

Operating income (loss) ...=... $ 48,000 $ 31,500 $ (8,500

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: . The vacated space will be remodeled at a cost of $6,200 and will be devoted to an expanded line of high-end carpet. Sales of carpet are expected to increase by $60,000. and the line's overall contribution margin ratio will rise by 5%. . Contemporary Trends can cut wallpaper's fixed costs by 40%. Remaining fixed costs will continue to be incurred. Customers who purchased wallpaper often bought paint and paint supplies. Sales of paint and paint supplies are expected to fall by 20%. . The firm will increase advertising expenditures by $12,500 to promote the expanded carpet line.

Required:

Problem 1: Should Contemporary Trends close its wallpaper operation?