Question No. 2

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 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

Sales

190,000

230,000

70,000

Less variable cost

114,000

161,000

56,000

Fixed costs

28,000

37,500

22,000

Total cost

142,000

198,500

78,000

operating income

48,000

31,500

-8,000

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

a.The vacated space will be remodeled at a cost of 15,000 and will be devoted to an expanded line of high and carpet sales of carpet are expected to increase by 100,000 (2 marks)

b.Contemporary can cut wallpapers fixed costs by 50%

c.Sales of paint and paint supplies are expected to fall by 30%

d.Considering (a),(b) and (c), explain your decision whether to drop or retain the wallpaper