Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products 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 this is done, sales of T-1 are expected to increase by 10 percent next year; the firm€™s cost structure will remain the same.

Required
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
2. What strategic factors should beconsidered?

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T-1 Sales Variable cost of goods sold Contribution margin Expenses $200,000 70,000 $130,000 T-2 S260,000 130,000 $130,000 Fixed corporate costs Variable selling and administration Fixed selling and administration 60,000 20,000 12,000 $ 92,000 $ 38,000 75,000 50,000 21,000 S146,000 $(16.000 Total expenses Operating income