Reference no: EM132510122

Point 1: 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.

Point 2: 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-1T-2

Sales$295,000 $336,000

Variable costs: Cost of goods sold 89,000 168,000

Selling & administrative 29,000 69,000

Contribution margin$177,000 $99,000

Fixed expenses: Fixed corporate costs 79,000 94,000

Fixed selling and administrative 31,000 40,000

Total fixed expenses$110,000 $134,000

Operating income$67,000 $(35,000)

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 $57,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).