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B) Ali One-stop Decorating sells paint and paint supplies, carpet, and wallpapers at a single-store location in Petaling Jaya. 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 delivery. The partial income statement for the year ended 31/12/2020 showed the following:

Paints & supplier carpeting wallpaper

(RM)(RM)(RM)

Sales 380,000460,000140,000

Variable Costs228,000322,000112,000

Fixed Costs 56,000 75,000 45,000

Total Costs284,000397,000157,000

Operating Income/(Loss) 96,000 63,000(17,000)

Ali 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:

1. The vacated space will be remodeled at a cost of RM 12,400 and will be devoted to an expanded line of high-end carpet. Sales of carpet are expected to increase by RM 200,000.
2. Ali can cut wallpapers fixed costs by 40%. Remaining fixed costs will continue to be incurred.
3. Customers who purchased wallpaper often bought paint and paint supplies. Contributions (sales minus variable costs) of paint and paint supplies are expected to be reduced by RM 30,400.
4. The firm will increase advertising expenditure by RM 25,000 to promote the expanded carpet line.

Required:

(B) i Should Ali close its wallpaper operation? Show your computations to support your answer.

(8 marks)

(B) ii What advantages might internet and magazine-based firms have over Ali that would allow these organizations to offer deeply discounted prices far below what Ali can offer.