Reference no: EM132463839

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: If the expected change in operating income is ($78,500) then by what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2?