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Relevant Costs and Benefits - Decision Making Assignment

Question 1. Should Tipton close its wallpaper operation? Show computations to support your answer.

Solution:

If wallpaper is closed and production stopped

 

 

Paint & Supplies

Carpeting

Wallpaper

Difference

Sales

$304,000

$580,000

$0

$884,000

Less: Variable Costs

$182,400

$377,000

$0

$559,400

Contribution

$121,600

$203,000

$0

$324,600

less: Fixed costs

 

$56,000

$75,000

$27,000

$158,000

Add: Increase in Contribution

$0

$0

$0

$0

Less: Remodeling Cost

$0

$12,400

$0

$12,400

Less: Advertisement Expenditure

$0

$25,000

$0

$25,000

Profit

$65,600

$90,600

$0

$156,200

Keeping Wallpaper


Paint & Supplies

Carpeting

Wallpaper

Difference

Sales

$380,000

$460,000

$140,000

$980,000

Less: Variable Costs

$228,000

$322,000

$112,000

$662,000

Contribution

$152,000

$138,000

$28,000

$318,000

less: Fixed costs

$56,000

$75,000

$45,000

$176,000

Less: Remodeling Cost

$0

$0

$0

$0

Less: Advertisement Expenditure

$0

$0

$0

$0

Profit

$96,000

$63,000

($17,000)

$142,000

contribution margin %

40.00%

30.00%

20.00%


Looks like Tipton should drop wall paper as net profit after dropping would increase from $142,000 to $156,200.

Notes:

Variable costs of paint and supplies 60%.

Variable costs for carpeting is now 65% instead of 70%.

18,000 fixed costs related to paints and supplies are reduced but $27,000 would be spent.

Question 2. 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?

Solution:

The remaining wall paper (inventory) shall eb treated as a sunk cost and as a result the net loss would be extended by another $23,700. It can also be sold if possible at a lower than market price to reduce overall losses.

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Question 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?

Solution:

As Tipton's competing firms offer discounts on shipping, providing quantity discounts, cash discounts , they would have advantage over Tipton in getting new customers as Tipton does not enjoy online sales benefitsand that can potentially lower Tipton'srevenue and profitability. Tipton management  must consider providing discounts to generate more sales and attract more customers.

Question 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.

Solution:



Paint & Supplies

Carpeting

Wallpaper

Difference

Sales

$400,000

$450,000

$130,000

$980,000

Less: Variable Costs

$240,000

$315,000

$104,000

$659,000

Contribution

$160,000

$135,000

$26,000

$321,000

less: Fixed costs

$56,000

$75,000

$45,000

$176,000

Less: Remodeling Cost

$0

$0

$0

$0

Less: Advertisement Expenditure

$0

$0

$0

$0

Profit

$104,000

$60,000

($19,000)

$145,000

As profit  is lower than alternative of closing wallpapers ,  there would not be any materialimpact on the decisions made above.

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