Question
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
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 percent next year, but the firms cost structure will remain the same.
T-1 | T-2 | |
---|---|---|
Sales | $ 290,000 | $ 332,000 |
Variable costs: | ||
Cost of goods sold | 88,000 | 166,000 |
Selling & administrative | 13,500 | 68,000 |
Contribution margin | $ 188,500 | $ 98,000 |
Fixed expenses: | ||
Fixed corporate costs | 78,000 | 93,000 |
Fixed selling and administrative | 30,000 | 39,000 |
Total fixed expenses | $ 108,000 | $ 132,000 |
Operating income | $ 80,500 | $ (34,000) |
Required:
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
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).)
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 $55,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
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