Question

ACC 650 - REVISED PROBLEM 14-47 #4

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:

4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (1) above. Show how
the solution will change if the followng information changes: sales were $416,000, $450,000, and
$140,000, for carpeting, paint and supplies, and wallpaper, respectively.

Answer 1

1.

Calculating Current contribution margin

	Carpeting	paints and supplies	wallpaper
sales	520000	390000	138000
Less-Variable cost	(312000)	(224000)	(108000)
cotribution margin	208000	166000	30000
Variable cost to sales ratio	60%	57.44%	78.26%

the current contribution margin ratio for carpeting line = 208000/520000= 40%.

This ratio will increase to 45%.

New sale of carpet line	=520000+130000 =650000
New contribution margin ratio	45%
New contribution margin for carpet	=650000*45% =292500
old contribution margin	208000
Rise in contribution	=292500-208000 =84500

If wallpaper is closed, then-

Loss of wall paper contribution margin	(30000)
Remodeling cost	(22600)
Added profitability from carpet	84500
Fixed cost saving(32000*60%)	19200
Decrease in contribution margin from paints& supplies (166000*30%)	(49800)
Increased advertising cost	(35000)
Income(Loss) from closure	(33700)

Tipton will be affected by loss of $33700 if wallpaper is closed.

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#Requirement 2

Inventory cost should be ignored.The inventory cost is sunk cost.Regardless of whether the department is closed, Tipton will have ainventory cost of 30000.

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#Requirement-3

These companies probably carry little or no inventory. When a customer places an order, the firm simply calls its supplier and acquires the goods. The result may be lower expenditures for storage and warehousing.

These firms do not need retail space for walk-in customers.

Internet- and magazine-based firms can conduct business globally. Tipton, on the other hand, is confined to a single store in Des Moines.

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#Requirement -4