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.

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.

1. Calculate the income or loss (from closure) if Tipton closes its wallpaper operation.

Sales Variable costs Fixed costs Total costs Operating income (loss) Paint and Supplies $380,000 $228,000 56,000 $284,000 $ 96,000e Carpeting Wallpaper $460,0005 148,000- $ 112,000 45,000 5397,000 157,000 63,000 (17,000) 75,000