Micheals One-Stop Decorating sells paint supplies, carpet, and wallpaper at a single store location in Chicago Illinois. Although the company has been profitable over the years, management has seen a significant decline in wallpaper sales and earnings. Much of the decline is attributable to a consumer shift away from wallpaper. Recent results are as follows:

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

Management is studying whether to close the Wallpaper department because of the changing market and accompanying loss. If the Wallpaper department is dropped the following changes are expected to occur:

• The space vacated by the Wallpaper department can be remodelled at a cost of $12,400 and will be devoted to an expanded line of high-end carpet.
• Sales of carpet is expected to increase by $120,000 with the introduction of the high-end carpet the carpet divisions overall contribution margin ratio will increase by five (5) percent points.
• Irvine will increase advertising expenses by $25,000 to promote its new line of high-end stereo equipment.
• Irvine can cut the Wallpaper departments fixed costs by 40 percent. Remaining fixed costs will continue to be incurred.
• Customers who purchased wallpaper often bought paint and paint supplies. If the Wallpaper department were to close than it is anticipated that sales in the paint and supplies department would fall by 20 percent.

Required:

1. Should Irvine close its Wallpaper department? Show detailed computations to support your answers.

2. Assume that Irvines Wallpaper department inventory at the time of the closure decision amounted to $23,700. How would you have treated this additional information in making the decision in a)?