In: Accounting
ACC 650 - REVISED PROBLEM 14-47 #3
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:
3. What advantages might Internet- and magazine-based firms have
over Tipton that would allow
these organizations to offer deeply discounted prices-prices far
below what Tipton can offer?
Advantages of internet and magazine-based firms over Tipton-
1) Lower variable cost of operations because it directly impacts the selling price set by an entity for its products or services.
2) Higher contribution margin as a percentage of sales results in sale of products at lower price because it is computed by reducing variable costs from the total sales.
3) Increased number of sales to a wide customer base in the market by attracting their attention through offering of more products at less value.
4) Better management of excess stock with the help of deep discounts offered
5) Long-standing goodwill in the market, resulting in providing higher value for money to its customers with the objective to satisfy and retain them in the long run.
As far as the decision to drop the wallpaper line, it is recommended that Tipton should not discontinue it's wallpaper line because it would lead to decrease in its total operating income from the existing position of $218,000 to $184,300 in the proposed scenario, as shown in the calculations in the image below.