Kool Kombinations (KK) sells paint and paint supplies, carpet and wallpaper at a single-store location in suburban Auckland. Although the company has been very profitable over the years, management has noticed a significant decline in wallpaper sales and profits. Much of this decline is attributable to the customers increasingly purchasing products on the Internet and from companies that advertise deeply discounted prices in magazines and offer customers free shipping and toll-free telephone numbers. Recent data on KK’s revenues and costs are presented below:

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 profit (loss) $96,000 $63,000 $(17,000)

Management are considering dropping wallpaper because of the changing market and accompanying loss. If this product line is dropped, the following changes are expected to occur:

 The vacated space will be remodelled 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 5 percentage points.
 Kool Kombinations can reduce wallpaper fixed costs by 40 per cent. 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 per cent.
 The firm will increase advertising expenditure by $25,000 to promote the expanded carpet line.

Required:

(I) Should KK close its wallpaper operation? Why? Show your calculations to support your reasoning and answer.

(ii) Assume that KKs’ 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 in (a) above? Explain.

(iii) What advantages might the internet- and magazine-based firms have over KK that would allow these organisations to offer deeply discounted prices – prices far below those that KK can offer? (make sure your reasoning is logical)

Kool Kombinations (KK) sells paint and paint supplies, carpet and wallpaper at a single-store location in suburban Auckland. Although the company has been very profitable over the years, management has noticed a significant decline in wallpaper sales and profits. Much of this decline is attributable to the customers increasingly purchasing products on the Internet and from companies that advertise deeply discounted prices in magazines and offer customers free shipping and toll-free telephone numbers. Recent data on KK’s revenues and costs are presented below:

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 profit (loss) $96,000 $63,000 $(17,000)

Management are considering dropping wallpaper because of the changing market and accompanying loss. If this product line is dropped, the following changes are expected to occur:

 The vacated space will be remodelled 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 5 percentage points.
 Kool Kombinations can reduce wallpaper fixed costs by 40 per cent. 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 per cent.
 The firm will increase advertising expenditure by $25,000 to promote the expanded carpet line.

Required:

(i) Should KK close its wallpaper operation? Why? Show your calculations to support your reasoning and answer.

(ii) Assume that KKs’ 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 in (a) above? Explain.

(iii) What advantages might the internet- and magazine-based firms have over KK that would allow these organisations to offer deeply discounted prices – prices far below those that KK can offer? (make sure your reasoning is logical)

I''ll give you a clue. If the division is dropped profitability will decline significantly therefore the company can afford to invest more money in product promotion

I''ll give you a clue. If the division is dropped profitability will decline significantly therefore the company can afford to invest more money in product promotion

I need answers not clue