Contemporary Trends sells paint and paint supplies, carpet, and wallpaper at a single-store location in suburban Baltimore. 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			Carpeting			Wallpaper
Sales	$	190,000		$	230,000		$	70,000
Variable costs	$	114,000		$	161,000		$	56,000
Fixed costs		28,000			37,500			22,500
Total costs	$	142,000		$	198,500		$	78,500
Operating income (loss)	$	48,000		$	31,500		$	(8,500	)

Management 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 $6,200 and will be devoted to an expanded line of high-end carpet. Sales of carpet are expected to increase by $60,000, and the lines overall contribution margin ratio will rise by five percentage points.
	Contemporary Trends can cut wallpapers 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 $12,500 to promote the expanded carpet line.

Required:

1-a.	Calculate the income or loss if Contemporary Trends closes its wallpaper operation.

1-b.

Should Contemporary Trends close its wallpaper operation?

	Yes
	No

2.

Assume that Contemporary Trends wallpaper inventory at the time of the closure decision amounted to $11,850. How would you have treated this additional information in making the decision?

	This cost is important. The revenue generated from the sale of this inventory is relevant to the closure decision.
	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 $11,850.

3.	What advantages might Internet- and magazine-based firms have over Contemporary Trends that would allow these organizations to offer deeply discounted pricesprices far below what Contemporary Trends can offer? (Select all that apply)

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