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 Required 1 a Calculate the income or loss if Tipton closes its wallpaper operation 1 b Should Tipton close its wallpaper operation 2 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 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

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 27, 2024

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

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.

Required:

1-a. Calculate the income or loss if Tipton closes its wallpaper operation.
1-b. Should Tipton close its wallpaper operation?
2. 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?
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?