Reference no: EM132510046
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.
T-1 T-2
Sales $230,000 $284,000
Variable costs: Cost of goods sold 76,000 142,000
Selling & administrative 27,500 56,000
Contribution margin $126,500 $86,000
Fixed expenses: Fixed corporate costs 66,000 81,000
Fixed selling and administrative 18,000 27,000
Total fixed expenses $84,000 $108,000
Operating income $42,500 $(22,000)
Required:
Question 1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
Question 2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
Question 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 $48,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)