Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known for
Question:
Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis of one of its product lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might drop T-2 and sell only T-1.
Barbour allocates fixed costs to products on the basis of sales revenue. When the president of Barbour saw the income statement, he agreed that T-2 should be dropped. If T-2 is dropped, sales of T-1 are expected to increase by 10% next year, but the firm’s cost structure will remain the same.
T-1 | T-2 | |
---|---|---|
Sales | $200,000 | $260,000 |
Variable costs of goods sold | 70,000 | 130,000 |
Contribution margin | $130,000 | $130,000 |
Expenses | ||
Fixed corporate costs | 60,000 | 75,000 |
Variable selling and administration | 20,000 | 50,000 |
Fixed selling and administration | 12,000 | 21,000 |
Total expenses | $92,000 | $146,000 |
Operating Costs | $38,000 | -$16,000 |
Required
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2?
3. What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed costs can be reduced by $45,000?
4. What strategic factors should be considered?
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins