Reference no: EM132425856
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 statements (see below), 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.
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T-1
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T-2
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Sales
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$290,000
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$332,000
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Variable costs:
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Cost of goods sold
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88,000
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166,000
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Selling & administrative
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13,500
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68,000
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Contribution margin
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$188,500
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$98,000
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Fixed expenses:
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Fixed corporate costs
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78,000
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93,000
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Fixed selling and administrative
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30,000
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39,000
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Total fixed expenses
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$108,000
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$132,000
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Operating income
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$80,500
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$(34,000)
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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 $55,500?