Question 4

HASF & companysells paint and paint supplies carpet and wallpaper at a single store location in suburban Baltiomore Although the company has been very profitable over the year management has seen very profitable over the year 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 customer free shipping and toll free telephone number recent figures follow

Paint and supplies Carpeting wallpaper Total

sales 250,000 230,000 70,000 550,000

less variable cost 170,000 161,000 56,000 387,000

fixed costs 40,000 40,000 40,000 120,000

total cost 210,000 201,000 96,000 507,000

operating income 40,000 29,000 -26,000 43,000

Other information:

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

1.The vacated space will be remodeled at a cost of 6,200 and will be devoted to an expanded line of high and carpet sales of carpet are expected to increase by 60,000 and the line overall contribution margin ratio will rise by 5%

2.Contemporaty can cut wallpapers fixed costs by 40%

3.Sales of paint and paint supplies are expected to fall by 20%

4.The firm will increase advertising expenditures by 12,500 to promote the expanded carpet line

Required:

At what amount of proiftwill be decrease after the dropped