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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
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:
4. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (1) above. Show how
the solution will change if the following information changes: sales were $400,000, $450,000, and
$130,000, for paint and supplies, carpeting, and wallpaper, respectively.
Answer & Explanation
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