Tipton One-Stop Decorating sells paint and paint supplies, carpet, and wallpaper
ID: 2524673 • Letter: T
Question
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 Sales Variable costs Fixed costs Total costs Carpeting Wallpaper $460,000 140,000 $322,000 112,000 45, 000 $284,000 $397,000 $ 157,000 Paint and Supplies $380,000 $228,000 56,000 75,000 Operating income (1oss) $ 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 vill increase advertising expenditures by $25,000 to promote the expanded carpet line.Explanation / Answer
Working note 1 : Calculation of Contribution amount & contribution %
Working Note 2. Increse in contribution amount for carpet opetations wallpaper operations is closed ;
New Contribution Amount =( Existing Contribution Margin + 5 %) * (Existing Sales + $120,000)
= (30 % + 5 %) * ($460,000 + $120,000) =35 % * $580,000 = $203,000
Increse in contribution amount =New Contribution Amount - Existing Contribution amount)
= $203,000 - $138,000 = $65,000
Answer
Calculation of increase / (decrease) in Income if Tipton closes wallpaper operations
Finan Answer : $12,800 decrease.
Conclusion : Since on closure of wallpaper operations will result in decrease of net income by $12,800 , it is advisable not to close the wallpaper operations
Particulars Paint & Supplies Carpenting Walpapers Sales 380,000 460,000 140,000 Variable Costs 228,000 322,000 112,000 Contribution 152,000 138,000 28,000 Contribution Margin % 40 % 30 % 20 %Related Questions
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