Reference no: EM133111644
Question - Tipton One-Stop Decorating sells paint and paint supplies, carpet and wallpaper at a single-store location in suburban Des Moines. Although the company has been very profitable over the years, 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 customers free shipping and toll-free telephone numbers. Recent figures follow.
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Paints and Supplies
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Carpeting
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Wallpaper
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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
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$322,000
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$112,000
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Fixed Costs
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56,000
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75,000
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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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Tipton 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 $12,400 and will be devoted to an expanded line of high-end carpet. Sales of carpet are expected to increase by $120,000, and the line's overall contribution margin ratio will rise by five percentage points.
Tipton can cut wallpaper's fixed costs by 40 percent. 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 percent.
The firm will increase advertising expenditures by $25,000 to promote the expanded carpet line.
Required - Answer the following questions (using your own approach):
1. Should Tipton close its wallpaper operation? Show computations to support your answer.
2. Assume that Tipton's wallpaper inventory at the time of the closure decision amounted to $23,700. How would you have treated this additional information in making the decision?