3) Luther Company, located in Largeville, Kansas (USA), is a retailer of durable, light-weight luggage products known for their high-quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, Kryptonite and Meteorite. Sales for Meteorite are decreasing, while purchase costs increasing. The firm is considering dropping the Meteorite product and only selling Kryptonite. Luther Company allocates fixed costs (both corporate and selling/administrative) to products based on sales revenue. When the president of the company saw the product-line income statements (presented below), he agreed that the Meteorite product should be dropped. If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm's cost structure will remain the same.

Kryptonite

Meteorite

Sales

$

200,000

$

320,000

Cost of goods sold (all variable)

90,000

160,000

Gross margin

110,000

160,000

Operating Expenses:

Fixed corporate costs

60,000

90,000

Variable selling and administrative expenses

22,000

59,000

Fixed selling and administrative expenses

12,000

18,000

Total Operating Expenses

94,000

167,000

Operating income (loss)

$

16,000

$

(7,000

)

Required:

1. Find the expected change in annual operating income by dropping the Meteorite product and selling only the Kryptonite product.

2. What strategic factors should be considered?