Dropping a Product Line

Oga Corporation is a retailer of high-tech products and is known for its good quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, FC-1 and FC-2. The sales for FC-1 are decreasing and the purchase costs are increasing. The firm might drop FC-2 and sell only FC-1.

Oga allocates fixed costs to products based on sales revenue. When the president saw the income statements (see below), she agreed that FC-2 should be dropped. If FC-2 is dropped, sales of C-1 are expected to increase by 10percent next year, but the firm's cost structure will remain the same.

	FC-1	FC-2
Sales	$230,000	$284,000
Variable costs:
Cost of goods sold	76,000	142,000
Selling & administrative	27,500	56,000
Contribution margin	$126,500	$ 86,000
Fixed expenses:
Fixed corporate costs	66,000	81,000
Fixed selling and administrative	18,000	27,000
Total fixed expenses	$ 84,000	$108,000
Operating income	$ 42,500	$(22,000)

Required: To earn full or partial marks, you need to show all calculations in good form.

1.Find the expected change in annual operating income by dropping FC-2 and selling only FC-1. Should FC-2 be dropped?

2. By what percentage would sales from FC-1 have to increase in order to make up for the financial loss from dropping FC-2?