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.

	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 lines overall contribution margin ratio will rise by five percentage points.
• Tipton 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 $25,000 to promote the expanded carpet line.

1A) Calculate the income or loss if Tipton closes its wallpaper operation.

(Income or Loss)

1B) Should Tipton close its wallpaper operation? (Yes or No)

1C) Assume that Tiptons 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?

	This cost is important. The revenue generated from the sale of this inventory is relevant to the closure decision.radio button unchecked1 of 2 This cost should be ignored. The inventory cost is sunk. Regardless of whether the department is closed, Tipton will have a wallpaper inventory of $23,700.radio button unchecked2 of 2

1D) 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? (Select which of the following statements (is) are true by selecting an "X".)

These companies probably carry little or no inventory. When a customer places an order, the firm simply calls its supplier and acquires the goods. The result may be lower expenditures for storage and warehousing.
These firms do not need retail space for walk-in customers.
Internet - and magazine-based firms can conduct business globally. Tipton, on the other hand, is confined to a single store in Des Moines.
Internet - and magazine-based firms have the advantage of point-of-purchase displays and personalized selling.
Internet - and magazine-based firms could have access to means of financing that Tipton might not.