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.

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?

Transcribed Image Text:

T-2 S200,000S260,000 130,000 S130,000 $130,000 70,000 Variable cost of goods sold Contribution margin Expenses Fixed corporate costs Variable slling and administration Fixed selling and administration 75,000 50,000 21,000 $ 92,000S146,000 $ 38,000 (16,000) 60,000 20,000 12,000 Total expenses Operating income