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 Operating income (loss) Paint and Supplies $ 380,000 $ 228,000 56,000 $ 284,000 $ 96,000 Carpeting $ 460,000 $ 322,000 75,000 $ 397,000 $ 63,000 ● Wallpaper $ 140,000 $ 112,000 45,000 $ 157,000 $ (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 will increase advertising expenditures by $25,000 to promote the expanded carpet line.
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 Operating income (loss) Paint and Supplies $ 380,000 $ 228,000 56,000 $ 284,000 $ 96,000 Carpeting $ 460,000 $ 322,000 75,000 $ 397,000 $ 63,000 ● Wallpaper $ 140,000 $ 112,000 45,000 $ 157,000 $ (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 will increase advertising expenditures by $25,000 to promote the expanded carpet line.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
1. Assume that Tipton’s 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?
2. 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?
Transcribed Image Text: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
Operating income (loss)
●
Paint and
Supplies
$ 380,000
$ 228,000
56,000
$ 284,000
$ 96,000
Carpeting
$ 460,000
$ 322,000
75,000
$ 397,000
$ 63,000
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:
Wallpaper
$ 140,000
$ 112,000
45,000
$ 157,000
$ (17,000)
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 will increase advertising expenditures by $25,000 to promote the expanded carpet line.
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