Reference no: EM132998305

Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known forits excellent quality and innovation. Recently, the firm conducted a relevant cost analysis of one of itsproduct lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and thepurchase 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 ofBarbour saw the income statements (see below), he agreed that T-2 should be dropped. If T-2 isdropped, sales of T-1 are expected to increase by 10% next year, but the firm's cost structure willremain the same.

                                                          T1                        T2
Sales                                     $225,000           280,000
Variable costs:
Cost of goods sold                      75,000          140000

Selling & administrative               37500             55000
Contribution margin                    112500           85000

Fixed expenses:
Fixed corporate costs                 65,000             80,000
Fixed selling and admin               17,000             26,000
Total fixed expenses                $82,000              $106,000
Operating income                     30,500                $ (21,000)

Required:

Problem 1: Find the expected change in annual operating income by dropping T-2 and selling only T-1.

Problem 2: By what percentage would sales from T-1 have to increase in order to make up the financial lossfrom dropping T-2?

Problem 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 $47,000?