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.

T1 T-2 Sales $275,000 $320,000 Variable costs: Cost of goods sold 85,000 160,000 Selling & administrative 25,000 65,000 Contribution margin $165,000 $ 95,000 Fixed expenses: Fixed corporate costs 75,000 90,000 Fixed selling and administrative 27,000 36,000 Total fixed expenses $102,000 $126,000 Operating income $ 63,000 $(31,000) '