Tipton One-Stop Decorating sells paint and paint supplies, carpet, and wallpaper

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 Paint and Supplies $380,000 $228,000 Carpeting Wallpaper $460,000 140,000 $322,000 112,000 Sales Variable costs Fixed costs Total costs Operating income (loss) 56,000 $284,000 $96,000 75,000 45,000 $397,000 157,000 $63,000 $ (17,000) 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: . 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

Explanation / Answer

1) a) Paint and Supplies Carpeting Wallpaper Sales $380,000.00 $460,000.00 $140,000.00 Less: Variable costs $228,000.00 $322,000.00 $112,000.00 Contribution Margin $152,000.00 $138,000.00 $28,000.00 Contribution Margin Ratio = CM/Sales 40.00% 30.00% 20.00% if Tipton closes its wallpaper operation Loss of wallpaper contribution margin -$28,000.00 Remodeling -$12,400.00 Added profitability from carpet sales* $65,000.00 Fixed cost savings ($45,000 x 40%) $18,000.00 Decreased contribution margin from paint and supplies ($152,000 x 20%) -$30,400.00 Increased advertising -$25,000.00 Income (loss) from closure -$12,800.00 Increased Carpet Sales = $460,000 + $120,000 $580,000.00 Increased Carpet's CM ratio (30% + 5%) 35.00% New Contribution Margin $203,000.00 Old Contribution Margin $138,000.00 Difference $65,000.00 b) Tipton should not closes the wallpaper operations because it will be worse off by $12,800 if it discontinues wallpaper .sales. 2) This cost should be ignored. The inventory cost is sunk . Regardless of whether the department is closed, Contemporary Trends will have a wallpaper inventory of $23700 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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