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.

T-1 T-2 Sales $215, 000 $272, 000 Variable costs: Cost of goods sold 73,000 136, 000 Selling & administrative 13,000 53,000 Contribution margin $129, 000 $ 83, 000 Fixed expenses: Fixed corporate costs 63,000 78, 000 Fixed selling and administrative 15 , 000 24,000 Total fixed expenses $ 78, 000 $102, 000 Operating income $ 51,000 $ ( 19 , 000)