Reference no: EM133094966
Problem - Irvine One-Stop Decorating sells paint supplies, carpet, and wallpaper at a single store location in Barrie, Ontario. Although the company has been profitable over the years, management has seen a significant decline in wallpaper sales and earnings. Much of the decline is attributable to a consumer shift away from wallpaper. Recent results are as follows:
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Paint and Supplies Department
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Carpeting Department
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Wallpaper Department
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Sales
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$380,000
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$460,000
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$140,000
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|
Variable costs
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228,000
|
322,000
|
112,000
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|
Fixed costs
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56,000
|
75,000
|
45,000
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|
Total costs
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284,000
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397,000
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157,000
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Operating income (loss)
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$96,000
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$63,000
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$(17,000)
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Management is studying whether to close the Wallpaper department because of the changing market and accompanying loss. If the Wallpaper department is dropped the following changes are expected to occur:
-The space vacated by the Wallpaper department can be remodeled at a cost of $12,400 and will be devoted to an expanded line of high-end carpet.
-Sales of carpet is expected to increase by $120,000 with the introduction of the high-end carpet the carpet division's overall contribution margin ratio will increase by five (5) percent points.
-Irvine will increase advertising expenses by $25,000 to promote its new line of high-end stereo equipment.
-Irvine can cut the Wallpaper department's fixed costs by 40 percent. Remaining fixed costs will continue to be incurred.
-Customers who purchased wallpaper often bought paint and paint supplies. If the Wallpaper department were to close than it is anticipated that sales in the paint and supplies department would fall by 20 percent.
Required -
a) Should Irvine close its Wallpaper department? Show detailed computations to support your answers.
b) Assume that Irvine's Wallpaper department inventory at the time of the closure decision amounted to $23,700. How would you have treated this additional information in making the decision in a)?