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	$ 210,000	$ 268,000
Variable costs:
Cost of goods sold	72,000	134,000
Selling & administrative	22,500	52,000
Contribution margin	$ 115,500	$ 82,000
Fixed expenses:
Fixed corporate costs	62,000	77,000
Fixed selling and administrative	14,000	23,000
Total fixed expenses	$ 76,000	$ 100,000
Operating income	$ 39,500	$ (18,000)

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 $42,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)

\begin{tabular}{|l|l|l|l|} \hline 1. & & & \\ \hline 2. & Required \% increase in sales from T1 & & % \\ \hline 3. & Required \% increase in sales from T1 & & % \\ \hline \end{tabular}