A B D E F H 1 J K L M z N Donna's Decorating sells paint, carpet and wallpaper. In recent 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 sell at deeply discounted prices and free shipping through magazines and too-free telephone numbers. Results of the latest year are as follows: 1 2 3 4 Sales 5 Variable costs Fixed costs Operating Income 7 (loss) Paint $380,000 228,000 56,000 Carpet $460,000 322,000 75,000 Wallpaper $140,000 112,000 45,000 $96,000 $63,000 ($17,000) 8 Donna is considering droppin wallpaper due to the recent results and declining sales. If wallpaper is dropped the following changes are expected to 9 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. 10 11 Fixed costs currently allocated to wallpaper will decrease by $27,000. 12 Customers who purchased wallpaper often bought paint. Sales of paint are expected to fall by 20% The firm plans to increase advertising expenditures by $25,000 to promote the expanded carpet line. 13 14 15 Required: 16 17 18 19 20 1. (10 points) Use incremental analysis to determine in Donna should discontinue the wallpaper line. 2. (5 points) The current inventory of wallpaper cost $23,700. How should this cost be factored into the decision? Pace Electronics currently produces the shipping containers it uses to deliver the electronics products it sells the monthly cost of producing 9,000 containers is as follows. DM DL Variable OH Fixed OH $6,000 6,600 4,200 37,200 $54,000 Ace Container Co. has offered to sell comparable containers to Pace for $2.70 each. If Pace buys the containers is will avoid $3,600 in fixed costs. Required 1 (10 points)Use incremental analysis to decide whether Pace should continue to make the containers. 2 (5 points) Pace has an offer to lease the space it currently uses to make the containers for $10,000 per month. Use incremental analysis to decide if your answer to part 1 would change