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ACC 650 - REVISED PROBLEM 14-47 #2 Tipton One-Stop Decorating sells paint and paint supplies, carpet,...

ACC 650 - REVISED PROBLEM 14-47 #2

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:
2. Assume that Tipton's wallpaper inventory at the time of the closure decision amounted to $30,000.
How would you have treated this additional information in making the decision?

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