usuhent is made Assuming the divisional manager is evaluated

usuhent is made. Assuming the divisional manager is evaluated based on ROl performance, which alternative do you think the manager will choose? 111. Incremental Analysis (40%) Contemporary Trends seils paint supplies, carpet, and wallpaper at a single-store location in Although the company has been very profitable over the years, management has seen a wallpaper sale suburban Baltimore. significant decine in s and earnings. Much of this decline is attributable to the internet and to companies that advertise deeply discounted process in magazines and offer customers free shipping and tol-free Recent figures follow. numbers. Paint & supplies $190,000 114,000 28,000 Walilpaper $70,000 56,000 22,500 arpet Sales $ 230,000 161,000 37,500 Variable costs Fixed costs Management is studying whether to drop wallpaper because of the changing market and accomparying loss. t the line is dropped, the following changes are expected to occur a. The vacated space will be remodeled at a cost of $ 6,200 and will be devoted to an expanded line of high-end carpet. Sales of carpet are expected to increase by $ 60,000and the line\'s oerall contribution mrgin will ie by 596. b. Contemporary Trends can cut wallpaper\'s fixed costs by 40 percent. Remaining fixed costs will continue to be incurred and will be allocated to the remaining product lines on the same proportion. c. Customers who purchased wallpapers often bought paint and paint supplies. Sales of paint and paint supplies are expected to fall by 20%. d. The firm will increase advertising expenditures by $ 12,500 to promote the expanded carpet line. Required 1. Developed a segmented income statement, by product and in total, for Contemporary Trend if it keeps producing the wallpaper Developed a segmented income statement, by product and in total,if the wallpaper is dropped? By how much would operating income increase or decrease? 2.

Solution

Segmented Income Statement of all Product Line

2. If Wallpaper is Dropped

Variable Cost avoided $56000

Add:Fixed cost avoided $22500 $78500

Less: Sales revenue lost   $70000

Increase Net Income of Company    $8500

	Paint	Carpet	Wallpaper	Total
Sales	190000	230000	70000	490000
Variable Cost	114000	161000	56000	331000
Contribution Margin	76000	69000	14000	159000
Fixed Cost	28000	37500	22500	88000
Net Income	48000	31500	(8500)	71000
Advertisement		12500
		44000