Question

ACC 650 - REVISED PROBLEM 14-47 #1

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.

		Paint and
	Carpeting	Supplies	Wallpaper
Sales	520,000	390,000	138,000
Variable costs	312,000	224,000	108,000
Fixed costs	90,000	64,000	32,000
Total costs	402,000	288,000	140,000
Operating income (loss)	118,000	102,000	(2,000)

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.

1) The vacated space will be remodeled at a cost of $22,600 and will be devoted to an expanded line
of high-end carpet. Sales of carpet are expected to increase by $130,000 and the line's overall
contribution margin ratio will rise by five percentage points.
2) Tipton can cut wallpaper's fixed costs by 60 percent. Remaining fixed costs will continue
to be incurred.
3) Customers who purchased wallpaper often bought paint and paint supplies. Sales of paint and paint
supplies are expected to fall by 30 percent.
4) The firm will increase advertising expenditures by $35,000 to promote the expanded carpet line.

Required:
1. Should Tipton close its wallpaper operation? Show computations to support your answer.

Answer 1

	Carpeting	Paint and Supplies	Wallpaper
Sales	$   520,000	$       390,000	$        138,000
Variable costs	$   312,000	$       224,000	$        108,000
Contribution Margin	$ 208,000	$       166,000	$          30,000

1.

Contribution Margin Lost - Wallpaper	$   (30,000)
Fixed Costs Saved - Wallpaper	$     19,200	=32000*60%
Contribution Margin Lost - Paint and Supplies	$   (49,800)	=-166000*30%
Increase in Contribution Margin - Carpeting	$     52,000	=130000*208/520
Remodeling Costs	$   (22,600)
Increase in Advertisement Expense	$     35,000
Finacial Advantage (Disadvantage)	$       3,800

Tipton Should close its wallpaper operation