Tipton One-Stop Decorating sells paint and paint supplies, carpet, and wallpaper at a single-store location

in suburban Des Moines. 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.

Problem 14-47

Closing an Unprofitable

Department

(LO 14-4, 14-5)

1. Income (loss) from closure:

$(12,800)

Paint and

Supplies Carpeting Wallpaper

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)

Tipton 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 $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.

Tipton can cut wallpaper's 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 $25,000 to promote the expanded carpet line.

Required:

1. Should Tipton close its wallpaper operation? Show computations to support your answer.

2. Assume that Tipton's wallpaper inventory at the time of the closure decision amounted to $23,700.

How would you have treated this additional information in making the decision?

3. What advantages might Internet- and magazine-based firms have over Tipton that would allow

these organizations to offer deeply discounted pricesprices far below what Tipton can offer?

4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (1) above. Show how

the solution will change if the following information changes: sales were $400,000, $450,000, and

$130,000, for paint and supplies, carpeting, and wallpaper, respectively.