Reference no: EM132514209

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                             $265,000              $312,000

Variable costs:

Cost of goods sold             83,000           156,000

Selling & administrative          23,000          63,000

Contribution margin             $159,000           $93,000

Fixed expenses:

Fixed corporate costs             73,000                 88,000

Fixed selling and administrative 25,000              34,000

Total fixed expenses                    $98,000             $122,000

Operating income                         $61,000             $(29,000)

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 $48,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)