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.

Required

1. Find the expected change in annual operating income by dropping T-2 and selling only T-1. (Round answer to nearest whole dollar.)

2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2? (Round your answer to 2 decimal places. For example, 56.568% = 56.57%.)

3. What is the required percentage increase in sales (rounded to 2 decimal places) from T-1 to compensate for lost margin from T-2, if total fixed costs can be reduced by $45,000?

4. What strategic factors should be considered in deciding whether to drop or to keep T-2?

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T-1 T-2 $200,000 $260,000 Sales Variable costs: Cost of goods sold Selling & administrative 70,000 130,000 50,000 20,000 $ 80,000 $110,000 Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative 60,000 75,000 21,000 $ 96,000 $ (16,000) 12,000 $ 72,000 Total fixed expenses $ 38,000 Operating income