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 firms cost structure will remain the same. T-1 T-2 Sales $ 250,000 $ 300,000 Variable costs: Cost of goods sold 80,000 150,000 Selling & administrative 32,500 60,000 Contribution margin $ 137,500 $ 90,000 Fixed expenses: Fixed corporate costs 70,000 85,000 Fixed selling and administrative 22,000 31,000 Total fixed expenses $ 92,000 $ 116,000 Operating income $ 45,500 $ (26,000 )

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 $54,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)