| Revised Problem 14-47 | | | | | | | |
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| 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 | | |
| | | | | | Carpeting | Supplies | Wallpaper | |
| | Sales | | | | 520,000 | 390,000 | 138,000 | | |
| | Variable costs | | | 312,000 | 224,000 | 108,000 | | |
| | Fixed costs | | | 90,000 | 64,000 | 32,000 | | |
| | Total costs | | | 402,000 | 288,000 | 140,000 | | |
| | Operating income (loss) | | 118,000 | 102,000 | (2,000) | | |
| | | | | | | | | | |
| 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. | |
| | | | | | | | | | |
| 1) The vacated space will be remodeled at a cost of $22,600 and will be devoted to an expanded line |
| of high-end carpet. Sales of carpet are expected to increase by $130,000 and the line's overall |
| contribution margin ratio will rise by five percentage points. | | | |
| 2) Tipton can cut wallpaper's fixed costs by 60 percent. Remaining fixed costs will continue |
| to be incurred. | | | | | | | | |
| 3) Customers who purchased wallpaper often bought paint and paint supplies. Sales of paint and paint |
| supplies are expected to fall by 30 percent. | | | | | |
| 4) The firm will increase advertising expenditures by $35,000 to promote the expanded carpet line. |
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| 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 $30,000. |
| 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 prices-prices 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 followng information changes: sales were $416,000, $450,000, and |
| $140,000, for carpeting, paint and supplies, and wallpaper, respectively. | |
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