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 statement, 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	$200,000	$260,000
Variable costs of goods sold	70,000	130,000
Contribution margin	$130,000	$130,000
Expenses
Fixed corporate costs	60,000	75,000
Variable selling and administration	20,000	50,000
Fixed selling and administration	12,000	21,000
Total expenses	$92,000	$146,000
Operating Costs	$38,000	-$16,000

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?

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 $45,000?

4. What strategic factors should be considered?