Reference no: EM132463822

You retail high tech products and are known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis of one of its product 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.

• Your firm allocates fixed costs to products on the basis of sales revenue. When the president of your firm 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% next year; the firm's cost structure will remain the same.

                                                                  T-1                           T-2

Sales                                       $ 275,000                 $ 320,000

Variable cost of goods sold              85,000                    160,000

Contribution margin                    $ 190,000                  $ 160,000

Expenses:

Fixed corporate costs                      75,000                   90,000

Variable selling and administration       25,000                  65,000

Fixed selling and administration          27,000                   36,000

Total expenses                           $ 127,000               $ 191,000

Operating income                        $ 63,000                $ (31,000)

Required:

Question 1: What are the expected change in annual operating income by dropping T-2 and selling only T-1?